Category Archives: Strategy

Even in Night, Procurement Shines Bright

The Winter Edition of CPO Agenda had a great article on how stand-out procurement functions are continuing to extend their reach and value despite volatile market conditions. In “How the Stars Shine Brighter”, the authors reviewed the 2008 Assessment of Excellence in Procurement from A.T. Kearney (AEP 2008) that surveyed and benchmarked almost 500 respondents against their industry and geographic peer groups as well as best-in-class companies.

The study identified three key trends from leading procurement practices that can be directly linked to the attainment of sustainable competitive advantage:

  • Leaders achieve a broader mandate to drive change,
  • Leaders develop dynamic new value-creation strategies to satisfy ever-increasing customer demands, and
  • Leaders continue to develop and maintain robust enabling capabilities in performance management, knowledge and information management, and human resources management.

Leaders Drive Change

In direct materials leaders typically control two-thirds of external expenditure — twice that of the average firm. In indirect materials, the proportion is 73% for leaders, 42% for followers. By addressing a larger portion of the total corporate spend, leaders are yielding overall procurement-related savings that are 2.3 times greater than the followers. For a $20 billion company that could represent a 21% advantage in earnings per share versus its competition.

How do they do this? They:

  • Align with Corporate Strategy
    The CPO maintains a close relationship with senior management to help him or her align procurement strategies with the overall corporate strategy.
  • Refine the Organizational Structure
    Today’s procurement organizations frequently follow a center-led model that features common policies, approaches and practices for purchasing company-wide.
  • Increase Strategic Focus
    Leaders focus on strategic initiatives, not transactional activities that are best left to automated systems.

Leaders Develop New Value-Creation Strategies

Leaders go above and beyond the basics, initiate supplier collaboration, and differentiate themselves through superior approaches to risk management, best-cost country sourcing, and sustainability. They

  • Take Sourcing Practices to New Heights
    Leaders take a highly systematic approach to the application of traditional sourcing strategies, including volume concentration, best-price evaluation and global sourcing, as well as more relationship-orientated approaches such as product specification and joint process improvement, and relationship restructuring. Leaders also create value by using sourcing and category management methods such as innovation network leveraging, product “teardown” (a common method of analysing competitors’ products), collaborative cost reduction, expressive bidding and price benchmarking, to name but a few, to a far greater extent than followers. As a result, they attain higher levels of cost savings and value.
  • Drive Supplier Collaboration and Innovation
    Leaders are redefining boundaries and reaping the benefits of true partnerships, such as more product and service innovation and faster time to market.
  • Unlock Value through Risk Management
    The majority of leaders systematically use internal risk mitigation strategies to ensure supply continuity, develop category management contingency plans, align supply security with their overall business risk tolerance goals, and define, measure and track risk management and supply chain key performance indicators (KPIs).
  • Source from Emerging Markets
    Leaders arrive to the party early, while the savings buffet is full and plentiful. Leaders demonstrate that potential obstacles around emerging market sourcing can be overcome by actively engaging with and investing in suppliers. The ability to manage risk — through supplier process auditing, process risk assessment, high-quality data reporting and analysis, and the placement of key procurement executives in offshore locations — gives the leaders confidence that their emerging market sourcing activities will bring cost improvements without introducing excess risk.
  • Follow Sustainability and Corporate Social Responsibility Best Practices
    Finding the right balance between economic viability, environmental awareness and social well-being is a significant challenge, but a competitive advantage can be gained by companies that locate intersection points for all three. Sustainability leaders are differentiating themselves in a number of ways, be it through reductions in energy use and waste, taking on a holistic, future-orientated focus, or extending sustainability outward to the extended enterprise.

Leaders Employ Robust Enabling Capabilities

Leaders measure actual benefits, perform audits of procurement benefits, examine the function’s impact on profit and loss, and track productivity performance indicators. Leaders

  • Employ Best-of-Breed Technology
    Leaders have taken spend visibility to the next level, linking systems to product development and product lifecycle management tools to further improve control and influence procurement decisions earlier in the design and decision-making process. Leaders are improving their business intelligence capabilities with respect to spend management, using techniques such as predictive modeling at a much faster rate than followers. And leaders hold, on average, more than five e-sourcing events per business day — a rate four times greater than that of the followers.
  • Win the Fierce Battle for Talent
    Leaders realise that continued success depends on their ability to attract and retain the right people.

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!