Category Archives: Strategy

Getting the CFO on the Side of Supply Chain

A recent article in i2’s Supply Chain Leader on “linking the CFO to supply chain execution” made a great point when it notes that a company needs to have a good understanding of its total costs and sources of value to align business strategy with the supply chain. It made an even better point when it noted that sometimes the best person to help you do this is the CFO, whose skill set is a competitive asset in its own right. After all, who else in the organization is as focused on reducing cash-to-cash cycle times, achieving profitable growth, delivering predictable profit margins, and reducing the company’s risk profile?

So how do you get the CFO on your side? Take some tips from the i2 article and explain to the CFO how good supply management:

  • Reduces Cash-to-Cash Cycle Times
    Through the perfect orders and accurate purchase orders that result from properly implemented and utilized e-Procurement systems, companies can optimize purchases and eliminate overpayments through the invoice matching capabilities that are built into leading best-of-breed systems.
  • Reduces the Company’s Risk Profile
    Effectively optimizing total landed cost, despite global supply chain uncertainties, helps in the management of corporate budgets and gross margin erosions. Without good supply management, companies will frequently consider the lower unit costs in choosing global suppliers and fail to consider the uncertainties inherent in global supply chains. Several factors impact the total landed cost, including:

    • elevated transportation costs
    • longer lead-times that increase in-transit inventory
    • lost business due to customs delays or unexpected demand surges
    • increased inventory holding costs
  • Achieves Profitable Growth
    Good supply management systems not only measure and model cost reductions, but also track the KPIs necessary to quantify the impact on revenue.
  • Delivers Predictable Revenue
    Supply management helps to deliver predictable revenue and profits on a continuous basis as it utilizes systems that maintain accurate future supply and demand information and make it available on a timely basis.

Every Check Has A Cost (So Streamline Your Workflows)

Paul Graham wrote a great article last November on PaulGraham.com on how Artists Ship. In the article, which starts off by noting that one of the big differences between big companies and startups is that big companies tend to have developed procedures to protect themselves against mistakes while a startup walks like a toddler, bashing into things and falling over all the time explains that the gradual accumulation of checks in an organization is a kind of learning that is based on responses to disasters that have happened to it or other companies in similar situations. For example, after giving a contract to a supplier who goes bankrupt and fails to deliver, a company might require all suppliers to prove they’re solvent before submitting bids.

As companies continue to grow, they invariably accumulate more checks, either as responses to disasters or as a result of hiring people from bigger companies who bring more checks with them for protecting against disasters which have not yet happened (and which may never happened).

But not all checks are good. The reality is that every check has a cost, and sometimes the cost can outweigh the benefit. For example, it might be prudent to make a supplier verify it’s solvency, but the cost to you could be substantial. For example, the best supplier might be the one that can’t spare the effort to get “verified” or who falls just short of a solvency bar that’s set too high. After all, do they really need to have one year of operating capital in the bank for a six month contract?

Before a check is instituted, it’s cost should be well understood. For example, consider the example given by Joel Spolsky of Joel on Software on arbitrary approval thresholds. In many companies, software costing up to some nominal amount, such as $1,000, can be bought by individual managers without any additional approvals, but software that exceeds the nominal threshold has to be approved by a committee. This process, which has to be babysat by the prospective vendor, is quite expensive and the net result is that software that you might have sold for $5,000 now has to be sold for $50,000 to recover the costs associated with having to sell to a committee. Thus, although the purpose of the committee was to ensure the company doesn’t waste money, it could end up causing the company to pay 10 times as much for basic software.

Checks on purchases will always be expensive, because the harder it is to sell something to you, the more it has to cost. If you’re too hard to sell too, the only people who will sell to you are those companies that specialize in selling to you — and they are not likely to be the companies making the goods and services you need the most. This creates a whole new level of inefficiency where you pay exponentially more for inefficient products.

Thus, although checks are important before you make any purchase, it’s important that the checks be balanced … the cost of the check should not exceed the benefit the organization experiences as a result. So continue to do your solvency checks before handing out those million dollar contracts, but when it comes to office supply spot buys, lose the check. Worst case scenario, you go across the street.

On the First Day of X-Mas … (Sourcing Strategy Selection)

On the first day of X-Mas
my blogger gave to me
a lesson in strategy.

Even in these uncertain times, everything should be sourced.

As I said before, two years ago to the day in fact, this doesn’t mean that you should apply an intense multi-stage strategic sourcing effort to everything you buy, but that you should have a strategy for dealing with every category — since that’s the key to success across the board. Some categories will be tackled with negotiation, some with strategic sourcing decision optimization, some with reverse auctions, and some with spot buys.

One way to start is to breakdown your spend by category (direct, outsourced, indirect/MRO) and part type (commodity, custom part, or strategic part). This gives you the following methodology grid:

Part Type/Spend Direct Outsourced Services Indirect / MRO
Strategic Collaboration with a small set of strategic suppliers Dedicated Contract Owner Collaboration with a best-in class provider for each category of services
Custom Decision Optimization on a Pre-Qualified Set of Suppliers Managed by a Strategic Outsourcing Provider Managed by a Senior Sourcing Professional
Commodity Reverse Auction Multi-Stage RFX Lowest Bid

For direct and indirect spend, you can also approach the problem by opportunity type:

Opportunity Methodology
Too many vendors Spend consolidation with 2-3 vendors
Too few vendors RFX to add vendors
Insufficient vendor knowledge RFI
Insufficient solution knowledge RFP
Insufficient vendor bids RFQ
Insufficient bid movement Auction
Complex bids / Constraints Decision Optimization
Contracts unavailable Contract Management
Unmonitored contracts Procurement Audit
No spend baseline Spend / Invoice Analysis
Overly complex category Disaggregation
Uncoordinated Sourcing Efforts Program Management

And, as Charles (of Next Level Purchasing), Eric (of BIQ), and I have said before, you should segment your opportunities into quick hit opportunities (that can be accomplished by an invoice review or quick reverse auction event), near term strategic sourcing opportunities (that can be accomplished by a multi-round sourcing event employing sophisticated negotiation and decision optimization techniques), and longer term supplier relationship / collaboration opportunities (that require changes in methodology and production). This allows you to get some quick wins to fund your efforts, some near term wins to demonstrate the long-term effectiveness of a strategic sourcing program, and long-term wins to bring continued success in the years ahead.

Although it’s hard to say with complete confidence what the best methodology is for any given organization without knowledge of the organization and its needs, it is easy to say with complete confidence that the existence of a methodology is sometimes more important than the actual methodology itself as organizations with well-defined methodologies for sourcing consistently outperform those without. (Just like organizations with well-trained and certified teams outperform those without consistent training and experience.) Furthermore, these organizations will tweak the methodology over time based upon experience and continued learning until they end up with a best-in-class approach to organizational supply management.

A Transformative Supply Chain Strategy

Aligning demand and supply profitability determines the competitivepositioning of an enterprise in a challenging marketplace. However, disconnected cross-organizational communication and collaboration often get in the way of achieving that alignment and result in drawn-out, dysfunctional sales and operations planning (S&OP) cycles. The situation is further complicated due to unforeseen or uncontrollable factors such as volatile customer demand, proliferating SKUs, increased new product introductions, global sourcing options and competition from multiple manufacturers.

Additionally, current manually-driven S&OP processes fail to alleviate many of these pressures and are not sufficient in today’s high-pressured business environment. In order to be successful, S&OP approaches must evolve to adopt the attributes of “integrated business planning” — incorporating truly cross-functional, multidimensional processes that include all elements of demand, supply and financial analysis in relation to the business goals and strategy. As a result, enterprises looking to modernize their S&OP processes need to embrace transformative strategies that encourage collaboration to drive improvement, according to a recent article on “Transformative Supply Chain Strategies” in Industry Week.

This can be achieved by breaking down the organizational silos in a transformation initiative that addresses key people, processes, and technologies. Such an initiative will prioritize forecasting, inventory, and production, assign clear ownership and accountability for specific processes, conduct proper business analyses in place of seat-of-the-pants reactions to current market conditions, and, most importantly, move away from technology silos to a single version of the truth.

Specifically, as the article points out, it will eliminate reporting tools and spreadsheets at the department level and move to an Integrated Business Planning (IBP) or a single Supply Chain Visibility (SCV) solution. If each department uses its own technology solution to address its own planning processes, the business works off of a myopic and disconnected view of S&OP that is inefficient, costly, and not sustainable. It’s the paradox of traditional “Business Intelligence” technology (and also why you can’t use traditional BI for Spend Analysis): the more you use, the less you know. Especially when spreadsheets are involved — which accomplish nothing more than generating multiple, inaccurate, versions of the data and not the single version of the truth that an enterprise needs to make good business decisions (especially when you consider that 90% of spreadsheets have non-trivial errors).

So throw out your spreadsheets and adopt proper sourcing, procurement, and supply chain solutions that centralize your transactions and supply chain data and generate the necessary reports off of a single version of the data. You’ll be better for it!

Secrets of Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness — decision rights and information flow.
Gary Neilson, Karla Martin, Elizabeth Powers, “The Secrets to Successful Strategy Execution”, Harvard Business Review

The above referenced article (registration and/or subscription may be required) is a great read for any procurement organization trying to guide their company down the execution path, which is critical in a market where stagnation can kill a company. It describes the four fundamental building blocks for successful strategy execution as identified by booz & co. over the past five years. In brief, they are:

  • clarify decision rights
    how are decisions made, who has the right to make the final decision, and how are they accountable; if people don’t know what decisions they can and can’t make, they’ll sit around waiting for someone else to make a decision rather than taking action themselves
  • design information flows
    this is usually twice as effective in improving execution than any structural change an organization can make
  • align motivators
    there should be a strong link between performance and reward, not a weak one; and managers should get rewarded for doing, not spending half of their time justifying their jobs and reporting upward
  • make structural changes
    only after you’ve figured out who should be responsible for what decisions, how information should flow, and how your managers and employees should get rewarded should you redesign your organizational chart, because only then will you know what structure will truly be more appropriate to your current organization than your current one

The reason why many organizations fail to execute successfully, is they go straight to structural changes because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Although they might get lucky sometimes and reap short-term benefits, they’re only addressing the symptoms of their problems, and not the underlying root causes, and it won’t be long until they end up at the same place again — performing poorly with an inefficient organizational structure.

The short story is that people in your organization have to be empowered to do their jobs, and not spend all their time reporting upwards and managing downwards; they need to have the information they need (when they need it) to do their jobs effectively; and the rewards have to be structured in such a way that they are rewarded for making the best decisions for the company as a whole, not just their department or themselves.

This also implies to me that an appropriate center-led purchasing operation can be the most effective one for your organization. How so? In order to operate effectively, a center-led purchasing organization will have to spend a significant amount of time deciding what is purchased in a distributed manner and what is purchased off of central agreements and who gets to make the decision as to whether a new item or product is purchased locally, department-wide, or organization wide; they’ll have to design efficient information flows to make sure that not only do the details of the centrally negotiated contracts and best practices flow out to each team across the globe but that information on actual purchases and newly discovered best practices flows back into the center of excellence; they’ll have to help management align motivators to make sure each team acts in the best interests of the company overall; and they’ll have to lead the identification and implementation of appropriate structural changes across the organization shortly after being formed (and identifying the best structure for the company) and whenever market changes require a reaction on their part.