Category Archives: Strategy

The Future of Business is … Customer Centric Supply Chains!

Phil Fersht of HFS Research recently did a great LinkedIn post summarizing a fascinating conversation with Malcolm Frank that summarized a few key takeaways, including the following:

For 25 years, IT services optimized SG&A instead of transforming cost of goods sold. AI changes that. The real value now sits in agentic, vertical, customer-facing transformation, not back-office efficiency.

Customer-facing transformation is definitely where the value is in a global economy that is (borderline) recessionary, with joblessness and insecurity increasing by the day, and most people having less (and less) to spend on non-essentials and essentials alike. If you want their business, especially if your product or service is discretionary, it needs to be what they want. With constantly crushing weights on their shoulders, they need products that make them feel good, that make them feel like they are being listened to and catered too, that were created for consumer use (and not for the use by the atypical person in the lab who created something just for them), etc. The companies that deliver those will be the big winners, not the ones that still follow the old Ford Mantra (where you can have any colour you want as long as it’s black).

However, it’s not just creating the product that the customers want because IF you can’t deliver the goods at a price point the majority of your customers can afford and will pay in tight/recessionary economies, then you won’t sell any product at all!

We all need to remember that COGS was always a proxy, as it was easy for the accountants to measure, the same way we use revenue as a proxy for determining if a company is an appropriate target for our software and services. In Procurement, it’s not revenue — it’s how much spend is external, how much we can actually manage (retailers can have large leases that make up a significant portion of external spend which Procurement can’t do a thing about), and how many categories are big enough to give us leverage or real options when sourcing that can lead to savings, quality improvements, more resilience, etc.

This means that the future of business is about two things:

  1. tailoring to customers (because we’re long beyond you can have any colour you want as long as its black) to maximize the amount they will pay (to the point they can pay), which Phil astutely noted in his post and
  2. (dynamically) re-configuring the supply chains (as needed) to offer the products at profitable price points based on what the majority of the market will pay

So this would mean it’s simultaneously optimizing the product mix for customer adoption while ensuring the supply chains are ready to serve and re-optimizing them as needed.

As was noted, at the end of the day, back-office costs are pretty insignificant compared to supply chain costs and increased profits from increased price points that create a product that maximizes what a customer will pay (because the product is precisely what the customer wants, and not a product that is simply close enough that it might work for them).

Myth-busting 2025 2015 Procurement Predictions and Trends! Part 6

Introduction

In our first instalment, we noted that the ambitious started pumping out 2025 prediction and trend articles in late November / early December, wanting to be ahead of the pack, even though there is rarely much value in these articles. First of all, and we say this with 25 years of experience in this space, the more they proclaim things will change … Secondly, the predictions all revolve around the same topics we’ve been talking about for almost two decades. In fact, if you dug up a Procurement predictions article for 2015, there’s a good chance 9 of the top 10 topic areas would be the same. (And see the links in our first article for two “future” series with about 3 dozen trends that are more or less as relevant now as they were then.)

In our last instalment, we continued our review of the 10 core predictions (and variants) that came out of our initial review of 71 “predictions” and “trends” across the first eight articles we found, in an effort to demonstrate that most of these aren’t ground-shattering, new, or, if they actually are, not going to happen because the more they proclaim things will change …

In this instalment, we’re again continuing to work our way up the list from the bottom to the top and continuing with “Strategic Value”.

Strategic Value

There were 7 predictions across the eight articles which basically revolved around “strategic value” with some sideline focus on the need for “flexibility” and “diversification”. As with almost every “prediction” and “trend” in this series, this is yet another prediction that makes headlines every year, no more important this year than the last, and no more likely to be addressed unless a disaster occurs that, if not handed to, and solved by, Procurement, could end the business. Before we discuss further, as is our custom, we will list the seven predictions.

  • Flexibility and Agility in Procurement
  • Future of Procurement: Operational Excellence and Innovation
  • Global Sourcing and Diversification
  • Innovation
  • Procurement Diversification Strategies
  • Procurement Takes the Lead Internally
  • Procurement Will Continue to Evolve to Become More Strategic

Every function in the business should be about value creation, not just Procurement, but of all the functions, Procurement is the one that is the most likely to be viewed as a cost centre since, fundamentally, Procurement exists to acquire supply in exchange for money. As a result, all it typically does is spend, even though, when done right, it spends less than the business would spend without the function.

But we all know spending less when

  • costs are rising across the board,
  • demand is rising, and
  • production and distribution complexity is increasing

is not easy. It is only accomplished through strategic efforts, meaning that the focus needs to be on strategy for Procurement to shine. And in an age where geopolitical-based disruption is higher than it’s been in over two decades, it’s easy to see why “diversification” is coming to the forefront in strategy.

It’s also easy to see why some of this is materializing as “friend-shoring”, although it really should be “near-shoring” and, when possible, “home-shoring”, since a strategic advantage comes from not needing to depend on neutral third parties whose alliances could shift at any time, and, even worse, adversarial third parties that will take your business when they feel like it and then cut you off when the winds shift direction. Moreover, in an age when supply assurance is becoming the most critical thing, multiple sources of supply are becoming more critical than ever. As is flexibility (and innovation). Willingness to shift supplier, supply, and sometimes even product designs at a moment’s notice to maintain supply assurance and, hopefully, profitable operations.

But in the end, the focus on strategy will be no more than usual unless a major disruption or near catastrophic event occurs that thrusts Procurement back into the limelight.

What Should Happen? (But Won’t!)

Procurement should take a good hard look at its operation and separate the strategic from the tactical, and get really strategic about that which it classifies as strategic. If the organization has “strategic” suppliers, then it should have performance tracking, management, and development software (as per a previous entry in this series) to help it manage productive, collaborative relationships. If the organization takes a category strategy to Sourcing and Procurement, then it should be practicing strategic category management. If the organization has a high risk supply chain, then risk management should be a strategic function to help the organization maintain uninterrupted supply. It should be more than just something they say, it should be something they do … where doing it has meaning and returns value. Going from strategic spend to strategic value-add.

That’s five down, five to go.

Sourcing Success in these Turbulent Times Require Long Term Planning and Cost Concessions

This originally posted on January 2 (2024).  This is being reposted, in case you missed it, due to the rising criticality of Long Term Planning!

In a McKinsey article a few months back on How medium-size enterprises can better manage sources, McKinsey said that small and medium-size enterprises often struggle to find Procurement cost savings. Yet there are ways to do it while still pursing growth and providing a superior customer experience. The article, which concluded with an action plan for procurement cost savings, recommended:

  • establishing CoE teams
  • improving forecasting
  • expanding (the) use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporating supplier-driven product improvements

which, of course, are all great suggestions, and mostly address four of the five reasons that McKinsey give that prevent companies from reining in spending, which included

  • a lack of spending transparency (which would have to be corrected to improve forecasting)
  • talent gaps (which can be minimized with the right tools, market intelligence, and CoE teams)
  • underused digital tools and automation (which is directly addressed by using more of them)
  • exclusion of procurement and supply chain in business decision (which would hopefully be a byproduct of a corporate culture for continuous cost improvement that only happens when procurement and supply chain is not involved higher up)

but the fifth is largely unaddressed — the myopic focus on the short term which McKinsey claims could be addressed by putting more effort into planning and forecasting. But that doesn’t solve the problem.

Better forecasting will allow for longer contracts to be signed for higher volumes, which can lead to long term strategic supplier relationships, and better planning can allow this to happen, but this does not completely address the need for long term planning.

Supply Chains today are not the supply chains of the last ten to twenty years.

  • rare earths are even rarer
  • many critical raw materials are in increasingly limited or short supply
  • transportation can be unpredictable in availability and cost; even though most of the world declared COVID over in mid-2022, China still had mandatory lockdowns, ocean carriers scrapped many of their ships for insurance (and in some cases, post-panamax ships that had never made a single voyage), airlines furloughed too many pilots who found other jobs or just flat out retired, and the long-haul trucking in North America (the UK, and many first-world countries) has been on a steady decline for over a deacde
  • ESG/GHG/Carbon Requirements are escalating around the globe and you need to be in compliance (both in terms of reporting 1/2/3 and ensuring you don’t exceed any caps)
  • human/labour rights are escalating and you have to be able to trace compliance down to the source in some jurisdictions; you need suppliers who insist on the same visibility that you do
  • diversity is important not just to meet arbitrary requirements for government programs or arbitrary internal goals, but to ensure you have the right insight and expertise to solve all types of problems that might arise

And you can’t effectively address any of these problems unless you think long term AND accept that some of the solutions will cost more up front.

  • In mid November, the trading price for Neodymium (a rare-earth that is critical for the creation of strong permanent magnets, which makes it possible to miniaturize many electronic devices, including the [smart]phone you might be reading this on) was over $87,000 USD/mt. In comparison, hot roll steel was around $850 USD/mt. In other words, Neodymium was 100 times more expensive than steel. And while you can still buy steel for about the same price you could 10 years ago (it was around $900 USD/mt), Neodynmium is almost $20,000 more (as it was around $69,000 USD/mt in November 2013). It’s not the only rare earth to increase about 26% in 10 years, with further increases on the horizon. You need to have a strategy to minimize your need (which could include product redesigns that use more sustainable alternatives or recycling strategies that use recovered materials from older phone models). And when it comes to recycled materials, due to a historical lack of recycling efforts, or research into technologies to make recycling efficient and cost effective, recycled materials are almost always more expensive at first. Always. But as adoption increases, plants, technologies, and processes get more efficient, and the cost goes down (while, at the same time, raw material prices for materials in limited supply continue to go up). In other words, if you want to mitigate the ever-increasing costs for rare earths and other materials that are in limited supply, you have to incorporate the use of recycled materials, and maybe even invest in your own plants (and recycle your own phones you buy back because it’s cheaper just to buy them back and extract the rare earths yourself than buy the recycled rare earths from someone else).
  • Global trade is costly and unpredictable. Supply assurance is finally dictating near-sourcing and home-sourcing (which SI has been advocating for almost fifteen years, as inevitable disaster was the logical conclusion of outsourcing everything to China as eventually a pandemic, global spat, natural disaster, or other event would send shockwaves through the world when it severely disrupted the trade routes [because even though the chances of a pandemic, natural disaster on the scale of Krakatoa or the Valdivia earthquake, or another catastrophic event is minimal in any given year, over the course of a century, it becomes very likely]), and that is going to require re-investing in those Mexican factories (that worked just fine, by the way) you shut down twenty years ago, training appropriately skilled workers in low cost North American (or Eastern Europe) locales, and paying a bit more per unit (and even transportation until the carriers rebuild those routes). But in the long term, as global transportation costs continue to rise, and the local-ish resources get much more efficient (using the best technology we have to offer), your costs, and transportation risks, will go down while your competitor costs continue to go up.
  • if you don’t insist, and ensure, up front that your suppliers can report the data you need, how will you get it; chances are those suppliers need help and modern systems, which temporarily increase their operational costs as they install, integrate, and learn the systems; not more than a few cents here and there per unit, but a noticeable blip on the overall costs none-the-less
  • if you want suppliers that monitor their supply chain and insist on no slave/forced/child labour, appropriately treated and well paid labour, and, better yet, a community focus throughout the supply chain (so that the humans who mine the materials, harvest the food stuffs, weave the silk, or otherwise do the foundational work have a reasonable quality of life, health, and safety), you’re going to have to put the effort in to find them and the extra money to support them in their humanitarian efforts; since most of these workers in remote low-cost locales are paid pennies on your dollar, it’s another blip on the total cost to ensure they are paid every penny they deserve, but it’s still a blip; but you can’t afford not to do it if your jurisdiction has laws making you responsible for slave labour that later gets discovered in your supply chain
  • and while diversity shouldn’t cost more, since it’s the same number of employees, the reality is that the supply base embracing it could be a minority, and if these minority suppliers suddenly become in demand, market dynamics may kick in and they may charge a premium that your competitor will pay; but, as new challenges continue to arise, you will need the diversity to solve them; so, another blip in the cost you need to absorb

In other words, you need the long term focus to guarantee success, and you need to understand that, up front, it may cost a bit more. However, done right, your costs will decrease over time while your competitors’ costs skyrocket. So if you truly want success, in any high dollar, strategic, or emerging category, plan for the long term. And you will truly succeed.

Strategic Procurement for Strategic M&A

A recent article over on Fierce Healthcare on how strategic procurement can maximize M&A benefits noted that consolidating procurement can slash costs by standardizing purchasing processes and taking advantage of volume discounts for supplies because a smart business buying strategy involves using one technology platform for purchasing a wide variety of products from multiple sources.

The healthcare sector has also been ripe with M&A over the past few years, with $13 Billion in revenue now required to be a top 20 healthcare system, as many systems have grown significantly as a result of inorganic M&A growth over the past few years. According to the article, the recent M&A activity has been characterized by cross-geography deals designed to create value by scaling investments in platform capabilities across digital, analytics, shared services and workforce management.

But Procurement can find more value beyond shared products, shared supply base, and shared systems.

As hinted in the article, Procurement can also:

  • identify opportunities for shared services across the merged companies:
    this can allow for service provider contract consolidation and renegotiation for better rates
  • better workforce management:
    Procurement can help analyze the workforce needs across the proposed combined organization to better reallocate workforce needs (and possibly reduce the need for outsourced services)

But it doesn’t have to stop there.

An organization spends money across:

  • employees
  • contractors
  • facilities
  • utilities
  • products
  • systems

Procurement can help identify opportunities across each of these.

In other words, don’t overlook:

  • facilities:
    maybe you can reduce the number of locations through relocation of some personnel, and even reduce the overall cost through better facility identification
  • utilities:
    some states have energy deregulation, and there is significant opportunity in telco (like SaaS)
  • software: well beyond the S2P tools

Anywhere money is spent, Procurement can help provide an objective, fact-based view — not just on product-based spend.

Less Than 1/3 of Organizations Have a CPO — How Will They Continue to Survive?

the doctor has yet to see a single study that said that more than 30% of (public) (listed) organizations have a CPO, and some have that number as low as 15%. He has to admit that he just DOES NOT get it. From a basic business point of view, if you go back to the first thing that they teach you in Business 101, it should be easy to see that it is one of the two most critical roles in an organization, and one of the four roles EVERY organization should have.

The first thing that they teach you is for a business to survive, it has to be profitable, and

Profit = Revenue – Expenses

This says that one of the two most important roles in an organization is the (acting) CRO, who is responsible for bringing the revenue in that is required for the business to operate. In a startup, the acting CRO could be the CEO who has to sell, sell, sell (or raise, raise, raise) until she has enough money to hire a CRO, but without revenue, there is no business.

This also says that the other most important role is the (acting) CPO, as the business will need products. Even a pure services business needs products to operate (equipment, software, office supplies, MRO, etc.), and those need to be obtained at a total cost that is less than the revenue available to pay for them. If the company is primarily a product company, then the majority of its spend will be on these products (and not products for operations or personnel), and the CPO is super critical. Now, in a primarily services company, this role may be fulfilled by the CEO (if the CEO is not sales oriented, but an ops or HR person), but will likely be fulfilled by the CFO or the HR Director/VP until the company is big enough, and spends enough on internal products, to hire a CPO.

Furthermore, this would imply that the third most important role is the CFO that ensures the money coming in and money going out are appropriately tracked and the budgets appropriately allocated and the financial reports and taxes appropriately filed with the government agencies. (But, if there are no funds flowing in and out, you don’t have a business, and, thus, don’t need a CFO.)

Finally, logic would dictate that the fourth most important role is the CEO that defines the strategy, direction, and enables each of these roles needs to be as successful as possible.

This also means that organizations that over-focus on the

  • CSO (Strategy): have their head in the clouds because strategy needs to be executed, and you don’t necessarily need a full time person in this role — a good exercise once every year to three (depending on your market) lead by a strategic expert could be enough
  • CMO (Marketing): are over valuing marketing because, while it’s important to get attention, you have convert leads into prospects into sales … and it’s the CRO that manages that entire process
  • C(R/C)O (Risk/Compliance): are putting the cart before the horses so they can’t leave the stables; while risk is critical, it has to be managed in a sales and procurement context
  • CTO (Technology): are not seeing the big picture; if you are a software organization, having a solid platform and infrastructure is critical, but if you are not selling the product, or you are not able to attract the talent you need to build the product (which may or may not be the CTO’s skillset), it’s suddenly less important

And, of course, this means that Head of Sales, R&D Director, VP Product, etc. also become secondary as sales is only part of the funnel, some R&D can be outsourced or acquired (since design can sometimes be one time), and without the ability to acquire the talent and goods you need, you can’t create the product.

But every organization has a CFO and CEO, the second most important positions. The majority have CMOs and CTOs, the third most important positions. And they all focus on Sales VPs, R&D, Products, etc. which are essential, but the fourth most important positions from a foundational and C-Suite perspective. But when it comes to CROs, less than 15% of organizations have them and when it comes to CPOS, less than 30% of organizations have them. It boggles the logical minds!

Now, the doctor knows he’s going to get a lot of flak for this for calling CMO, CTO, etc. third and fourth on the importance scale, because they are critical roles in many organizations, but if you go back to basics, logically they are not the most critical roles that must be filled.