Category Archives: Supplier Management

The Procurement Game Plan: A Review Part I.2

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our last post, we set the stage with The Purchasing Professional’s 10 Commandments. In this post we’re going to continue our fairly detailed review of this book, which will span four or five posts. We’ll start by covering the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon.

The first chapter on Procurement’s Place in the organization starts out with an overview of management’s expectations of modern Procurement — something every Procurement Pro needs to know when finding a (new) job in today’s highly competitive skill-based marketplace. We’re well beyond the time when all that was expected of Supply Management was cost savings. Now, with costs rising and consumer belts tightening, Supply Management is also being tasked to deliver productivity improvements, brand & differentiation support, customer satisfacation, cash flow improvements, great service, competitive advantage, and sometimes even revenue. It’s a tall order for a single organization — it’s good that the strategies and tools exist to deliver. (And that’s kind of what this blog is all about, but the doctor digresses.)

The chapter then dives into the types of goals that Procurement / Supply Management organizations have, and this is where the value of the book starts to kick in. Organizations, depending on their stage of maturity, either have no (documented) goals, which is very bad, vague goals (with no meaningful measurable targets), which is bad as a professional will not know how important each goal is relative to other goals, SMART (Specific, Measurable, Attainable, Relevant, and Time-Bound) goals, which are good and a minimum requirement for organizational success, or Strategic SMART goals, which are great as they also tie the SMART goals to overall organizational strategy. A world-class supply management organization puts the good of the organization before the good of itself.

The chapter also discusses strategic vs. tactical procurement, Procurement as a Profit Centre, Procurement as a Service Centre, and Procurement’s Role in Specification Writing — but the other key section of the chapter is The Procurement Manifesto. Because it can be difficult to gain buy-in from functional departments when trying to get them to accept Procurement’s involvement, it is important to have a list of reasons why it will benefit them to work with Procurement. Your Supply Management organization should have such a list and should describe then in The Procurement Manifesto that can be given to the other organizational units. For details on what to include, see the book.

The next chapter discusses Supply Management Strategy — The Procurement Playbook if you will. The existence of an appropriately written guiding document will help keep the organization on the same page and help it to achieve its goals. Such a document must contain the following five sections in order to meet the department’s needs:

  1. The Procurement Organization’s Business Plan
  2. The Procurement Organization Structure
  3. Cost Control Strategies
  4. Risk Management Strategies
  5. The Supply Management Sourcing & Procurement Methodologies

Each piece of the puzzle must be clearly defined and outlined, and each organizational member must be on the same page. For details on how to write the Procurement business plan, on what types of cost control strategies to focus on, and what types of risk management strategies might be included, see the book.

One of the key parts of this chapter is the section on standard supplier selection criteria. The authors note that you should use a hierarchy of constraints and criteria every time you select a supplier. That hierarchy must include all of the relevant selection criteria, ordered and weighted so that each supplier can be compared fairly. This is sometimes the only way to determine which supplier will be the best fit for an organization. Generally speaking, this hierarchy should contain cost, value, quality, service, social responsibility, convenience, risk, and agility at a minimum, with other factors added depending on the goods or service being sourced. The weightings and rankings will be project specific.

The next chapter on Procurement Talent Management is one of the key chapters of the books and contains one of the key messages, talent is key to success. Without it, no amount of technology or transition management will help. It does a great job of discussing the five facets of the talent management cycle — Assess, Retain, Develop, Recruit, and Unify — and how each is necessary for organizational success. It also points out that they are not sequential and, depending on organizational needs, they may all need to be addressed simultaneously. Not only is talent management more important than many organizations prioritize it in their key issues list, but it is more difficult than many organizations would lead you to believe. This is a chapter to be reviewed in depth as almost every point matters, but a key point it addresses that is often missed is that education is a retention tool. Real professionals want to learn and improve, and will value an employer that not only allows them to do that, but that sponsors their education and efforts to improve themselves. The value of educating a resource is many times the up-front investment. Many, many times. The only point I’d disagree with in the entire chapter is the statement that by working with the business schools of the universities in your area, you can hire (at no cost/credit only or at minimal cost) intelligent and hard-working interns to take away the burden of tactical work from your strategic sourcing team members. While it is true that you can hire these intelligent, eager, hard-working resources at little-cost to do just this, they will need regular supervision from your senior Procurement Professionals, and this is a hidden cost you will need to account for.

The next chapter, and the final chapter that we’ll cover in this post, is on social responsibility in procurement: the new rules for a more responsible game. Whether this is important to your organization now or not, it will soon be as more and more consumers demand environmental or social responsibility, so you better get a handle on how it is going to impact your organization now, or you’ll be scrambling later when the media has you under the gone. Not a situation any Supply Management organization wants to be in when they can eliminate the risk with some careful research, planning, and a social responsibility program – which may not have to be all that extensive or demanding.

One of the key points covered by the chapter, which is often missed by other books, is ethics. Not only does social responsibility start with ethical behaviour, but a perceived lack of ethics, real or not, can land you and your organization in hot-water. As an example, the authors describe some recent government scandals, including one that got their mayor in some very hot water. In 2007, Mayor Luke Ravenstahl accepted two days of golf in the Mario Lemieux Celebrity Invitational from UPMC and the Pittsburgh Penguins, valued at $9K. His defence is that while the city’s ethics code limited city officials to accept admission to cultural or athletic events valued at $250 or less per year, charitable outings were exempted. This may have been a charitable event, but it’s value created a perceived conflict of interest that landed him in very hot water with the media. Then, a few months later, he decided he wanted to accept free tickets to go to a Stanley Cup Final game against the Detroit Red Wings. This time, he asked for an official legal opinion first, but it didn’t matter because the ticket value was very high and another councillor said he made half of the Mayor’s salary and pays for his hockey tickets out of his own pocket and the mayor should do the same. The lesson is that even if you don’t violate the ethics or gift acceptance policy of your organization, if there is any chance your actions could be perceived by a (large) group of people as unethical, you probably shouldn’t do it. And if you have to think about whether or not something is ethical, and, even worse, think you have to ask permission, just don’t do it.

The sections on the supplier code of conduct, green procurement, and supplier diversity, which for the most part cover all of the basics, are also quite good and worth a careful read.

That’s it for Part I. In Part II, we’ll discuss the next four chapters on Strategic Sourcing, Supplier Qualification, and Negotiations. Stay tuned.

Supply Chain Disaster Management

Earlier this year, EBN Online ran a good article on “Managing the Variables in a Supply Chain Disaster” that outlined the basic steps a global company can use to get started on planning for a disaster.

It’s obvious, with all of the recent natural disasters, political disasters, and economic disasters, that a supply chain natural disaster is coming your way. It’s just a question of what, when, and how it is going to impact your supply chain. That’s why you need to plan. So where do you start?

According to the author, start by getting all of the departments together — IT, operations, sales, warehousing, administration, and management — to help map out the entire upstream and downstream supply network and determine where the different risk points are and what risks are most likely to materialize. And, as Jim Lawton points out in this Industry Week article on “Country Risk — What You’re Overlooking”, you have to not only focus on your suppliers and the countries they are located in (whch contribute to the political, economic, and commercial risks that are faced by your organization), but your suppliers’ suppliers and the countries they are located in.

Then run a variety of “what if” scenarios to see how the company could recover if supply is interrupted, a warehouse goes up in smoke, a supplier becomes unavailable, freight rates or tarrifs rise substantially, preferred raw materials or components get banned for regulatory reasons, or something else possible, but not predictable, happens. If there is no way to recover, something has to be done now before it’s too late for your supply chain, and maybe your entire organization. For example, if all of the company’s supply for a certain component is from South Korea, and supply from South Korea gets cut off, there would be no recovery. The company either has to find a secondary source of supply from another country, or a way to use a slightly different component to accomplish the same task.

If a moderate increase in freight rates or tarrifs would prevent the company from being able to source a raw material at a price that would allow the company to turn a profit on the finished product, then the company has to identify alternate, cheaper, transportation methods, a way to further save on raw material costs, or a way to increase the value, and thus the selling price, on the finished product. If a raw material gets banned from usage in the product the organization plans on importing into Europe, then the organization has to have a way to produce the component using a different raw material, which could require a different design or manufacturing method, which could add cost as well.

The short of the story is that disaster planning is more than just identifying the upstream supply network and more than just identifying what could go wrong, but also identifying how a recovery could be initiated if necessary.

11 Ways to Improve Your Supply Chain Management

Late last year, Enterprise Apps Today had a great article on 11 Ways to Improve Your Supply Chain Management. A few of these are not repeated, or not listened to, enough, including:

  • Throw Away Your Spreadsheets
    As Sourcing Innovation has reminded you, Spreadsheets, which are riddled with errors and outdated information, Will Cost You Billions! Billion dollar accounting errors have resulted from spreadsheets on more than one occasion!
  • Manage Information, Don’t Use Information Management
    If the system doesn’t facilitate proper collection, identification, and analysis of the information required to make an informed decision, and make such easy to do, it’s not the right system for your supply chain operation.
  • Monitor the Performance of Each Partner in the Supply Chain
    Whether that partner is up stream or downstream. Waiting until a shipment is missed or a customer is late with a payment is too late to begin a problem diagnosis or issue resolution.
  • Remember that the Supply Chain Doesn’t Begin at the Warehouse or End on the Store Shelf
    More important than ensuring products are stocked on the shelves is that those products are [considered] desirable by your customers. If the product ain’t selling, it don’t matter that it’s stocked. It’s all about the end customer, and making sure the product is what they want from the raw materials up, with no child labour or sweatshops in the equation.

Can Cost Management On Its Own Be Strategic?

A recent issue of eSide Supply Management published a piece on “Strategic Cost Management and the Supply Base” that, while full of good advice, might be misleading to an up-and-coming Supply Management practitioner who needs to be set on the right road early on. However, before I can explain, let’s review the key points from the article.

The article started off great when the author noted that:

It might sound obvious, but when faced with a cost improvement challenge from your business, a good place to start is to think about what you’re practically being asked to do. Does the scope of the request apply to an innovative product or service whereby you more likely need to achieve an optimized cost, while simultaneously trading off against other attributes such as performance, delivery channel or customer appeal? Or, is the focus on a current product or service which is no longer deemed competitive or requires maintenance of a current selling price via cost reduction efforts.

The reality is that cost management is not simply keeping prices down. It’s keeping total cost down — where total cost is the total lifecycle cost of the product, which includes acquisition, manufacturing, distribution, sale, warranty, return, and disposal — while keeping total value up — which includes quantitative factors such as low defect rates and high reliability and qualitative factors such as market appeal and differentiation. And the best way to achieve this goal will be different for every product.

And the goal will always be cost, and not price, reduction, because cost reduction is typically sustainable over the long term, while price reduction is often a short-term commercial concession, which is then typically reversed later when the power balance in the buyer/supplier dynamic changes.

However, cost reduction is a more difficult task, especially when the suppliers have power, but there are tools available to help the buyer. The author does a good job of pointing out some of them, including:

  • analytics and benchmarking
    which can provide a buyer with a detailed cost breakdown and a foundation for an accurate cost (of production and distribution) model — which helps the buyer understand how much it should be costing the supplier and what level of profit margin the supplier is trying to get
  • integrated product teams
    whose collective understanding of the product or service from a production, distribution, use, and repair and recovery perspective can shed insight on potential opportunities for cost reduction that a supply manager may not see on his own
  • supplier involvement (from a technical perspective)
    a good supplier is full of innovative ideas to provide your organization with more value (and keep you as a customer) — especially if you bypass sales and go straight to the product engineers or service professionals (as they know where the cost is)

But even though this will help with the multifaceted, complex and often perplexing arena of supplier cost management that supply management professionals have to deal with on a daily basis, it kind of misses the full picture — that cost is only one component of strategic supply management and if supply is strategically managed, cost will fall in line as the buyer will know what costs need to be managed and what costs (of little consequence) can, more-or-less, be ignored.

After all, it’s usually not the initial price that constitutes most of the cost, but the unexpected expedited deliveries, the unexpected high rate of failure and warranty returns, the cost of unhappy customer retention, the losses associated with inventory stock-outs because the supplier couldn’t deliver on time at all (even with expedited deliveries) that constitute most of the unnecessary cost in a category. Control the supply, control the cost.

Thoughts?

Managing Indirect Spend: An In-Depth Review, Part III

In our last post, which ended the review of Part II of Managing Indirect Spend, a new book by William (Bill) Dorn and Joe Payne of Source One that takes you on an excellent adventure through the world of indirect sourcing (that they have been living in for the past two decades, well before Strategic Sourcing and Supply Management became cool), we discussed the non-software tools at a sourcing professional’s disposal, Procurement Services Providers (PSPs), and the (common) mistakes that can kill a sourcing project. This wrapped up our discussion of the capabilities at a sourcing professional’s disposal. Today, we’re going to discuss Part III, Examples from the Field, and focus on some of the results that can be obtained when applying the best practices discussed in the section.

The examples focussed around the gains that can be achieved by collaborating with suppliers, leveraging supplier feedback, and analyzing data — which, as SI outlined in Spend Visibility: An Implementation Guide, we know to be significant even before the application of additional tools and techniques. We’ll start with supplier collaboration.

As Bill and Joe point out, collaborating with your suppliers can produce surprising and profitable results. In fact, collaborating with your entire supply chain (including your suppliers’ suppliers) can often produce sustainable results that equate to large cost savings opportunities. Plus, it encourages partnerships with your suppliers, which may lead to your company being the first in line for new product developments or other supplier benefits.

Consider these examples from the text:

  • specifying printer models and toner requirements, instead of brand name toner cartridges, generally leads to savings north of 50% when suppliers are asked to propose low-cost (non-OEM) solutions
  • the cost of a simple chemical compound was reduced 39% when the buyer worked with the supplier to jointly source expensive regulatory valves at a higher volume
  • the willingness to work with a new supplier that produced a required solvent at an insufficient level of purity (and guarantee them a reasonable amount of business under the right circumstances) if the supplier was willing to refine their manufacturing process to get to the required level of purity convinced the supplier to make the infrastructure investment and saved the customer a considerable amount of money now that a third, lower-cost supplier, had entered the market

In addition to collaborating with suppliers, you can use the information they provide to your advantage. By leveraging the information that your supply chain provides, you can actually achieve deeper discounts in the products or services you are buying, and improve the overall relationship and integration with each of your suppliers. This can lead to results like the following:

  • by working with suppliers to find out what was possible, the buyer was able to approach the incumbent and ask for a new type of telecommunications infrastructure that reduced organizational cost by 35%
  • by working with the supplier to find out when the supplier wanted to make a sale, and the supplier representative, who was quite eager to make a bonus target, the customer was able to get a software product (only available through resellers) at cost with terms of net 30 days, allowing it to delay the purchase to the following quarter (while still allowing the supplier, and the representative, to recognize the sale this quarter)
  • a buyer which needed specialized multi-million dollar computer equipment that could only be supplied by one supplier was able to reduce its costs and get millions of free marketing by allowing the supplier to use its logo in its advertisements (which the supplier promised to spend millions on if the buyer allowed the use of its logo)

Lastly, there are great opportunities to be had through data analysis, including:

  • a detailed line analysis that will often identify a significant number of (secondary) phone lines that are not required that are costing the organization hundreds (or thousands) each
  • the appropriate segregation of MRO spend into the right buckets that will allow suppliers to be more competitive on the categories they are strong in, as this will decrease overall cost significantly
  • the identification of non-compliant spend and the top offenders as a few choice words from the CFO to these individuals (or their superiors) will considerably decrease maverick spend quickly increase realized savings 20% to 30%

There are plenty more examples, but considering that SI essentially co-wrote a book detailing what they are and how to find them in Spend Visibility: An Implementation Guide (free download, no registration required), we’re not going to go into them any further in this post, especially since the important lesson is that you should be leveraging the information provided by the supply chain (for analysis) and then working with your suppliers to implement the best solution(s) you identify.

Stay tuned. After another break, SI will conclude it’s review of Managing Indirect Spend later this month with Part IV: How to Do It.

Series to date: