The New Anti-Trade Movement and Your Supply Chain – risk or opportunity?

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Since ancient times, trade deals have been struck with foreign countries. You could say that trade and tax were the spark that has ignited revolutions and wars.

The promise for the US to abandon the Trans-Pacific Partnership, coupled with the UK vote to leave the EU and change trade agreements across Europe, is raising concerns and signaling an anti-free trade sentiment. Free trade advocates are disappointed for sure and the future is uncertain.

The political climate has changed, bringing more focus on a reshoring movement in the US. Many of us in procurement were driven to support low cost country sourcing. Whether moving sources back to the US or with the potential of tariffs, duties and increased fees, our strategy and profit plans could be at risk.

While we don’t know what will evolve in terms of the future of trade, there are opportunities and risks. The opportunities will be presented if the US renegotiates trade deals to take advantage of the ability to drive US exports. The risks come if trade deals do not happen and increase costs to protect US manufacturing hurt the bottom line. I’m advising my clients to:

  1. Review all internationally sourced components
  2. Understand the strategic nature of all of the internationally sourced categories
  3. Identify opportunities for alternate sourcing
  4. Understand items with high capital investment and technology as a driver (and the implications of not being able to switch suppliers)
  5. Create a currency strategy
  6. Drive best value sourcing

It’s always better to be prepared than surprised.

What’s your plan?

Commodities Could Be Trouble in 2017

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Have we been lured into complacency with commodities that have fallen over the past year impacting cost of major raw materials and our profitability? With corn over 40% down, copper 38% down and wheat more than 30% down, it is apparent that we have enjoyed significant market opportunities. Having traded commodities in my career, I know that commodities run on a cycle and the good times may be close to an end. A good example of commodity cycles is peanuts, where prices rose 33% in 2016, but bumper crops were expected in the current season, which should drive prices down. Today in the Spend Matters guest post US Peanut Prices Increase More Than 30% in 2016, Mintec noted persistent rains in China have caused high moisture levels in the peanut crop, which will greatly affect quality and price.

In a Bloomberg report on Barclays Black Swan Threats to Commodities, there is upside risk for raw materials in 2017 and the likelihood of further upside risk based on radical changes in the global economy, energy markets and global political risks on trade. Another dynamic that could impact all buyers involved in international trade is the opportunity and potential for disruption and risk posed by currency. With Switzerland announcing that it’s abandoning its peg to the Euro, the unknown impact of Brexit and China changing how exchange rates are fixed, it could signal volatility.

In many companies, procurement and finance have a joint obligation to protect the company’s profit plan. The goal of managing commodities and currency is not to speculate, but to assure the profitability across the organization is maintained. If you’re planning a commodity or currency strategy, here are three approaches to consider:

  1. Cover 70 to 80% of the plan, leaving 20 to 30% flexibility to move with key markets
  2. Develop formula-based pricing levels
  3. Work with finance to build currency hedging by buying foreign currency or by changing contract pricing to US dollars

It does make sense to look on the horizon for any currency or commodity that might pose potential risks and build the plan prior to any change in market pricing. There is no doubt that 2017 will bring a new frontier to global trade and it’s best to be prepared, rather than be surprised.

How will you manage volatility should it arise?

5 Keys to Success for CEOs

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Happy New Year! The new year is always an opportunity to reflect and, since I have the opportunity to work with many businesses and CEOs, the past few days I’ve thought about what makes a CEO achieve excellence. Considering what I observed the past year, here are 5 keys for business success.

  1. Companies cannot just cut expenses to achieve profitability. They must grow the top line, develop innovative products, meet marketplace demands and focus on growth.
  2. Any organization that lacks a clear and simple strategy is like being lost in the woods without a GPS; the organization must have a clear focus and understandable direction.
  3. The key to any business is its customers. It is essential to know who the customer is, what they need and want. Without a clear focus on the customer the business is subject to fail or significantly lose market share.
  4. Employees must know the industry, market, have sensitivity to competition and digital disruption and be able to rapidly react to changes. This requires leadership, talent management and clear communication of goals and objectives.
  5. From the top down, the leaders and employees of the organization must display integrity at all times. It is unfortunate when the leader of the organization lacks integrity; it cascades through the organization.

Boards of Directors have a duty to ensure the survival and health of the organizations they serve. I am on several Boards of Directors and I hold the organizations to these standards. I also use these as key considerations when engaging in new client relationships.

What do you think is key to business success?

Reward and recognition – the neglected tool for successful teams

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It is surprising just how many corporate executives fail to understand that it’s the simple things that make a difference.

Whenever I am working with the indirect expenditure in client organizations, I build cross-business, cross-functional teams. These teams are given clear objectives and goals and asked to build a team charter outlining their mission, roles, responsibilities and accountabilities. In many cases, the teams are launched with some training and development and a mission to gather data. Within 4 weeks, the team returns to make a presentation to senior executives outlining the mission, goals savings opportunities, risks and strategies. For many of the team members, this is their first exposure corporate executives.

Once approved, the team is given 4 additional weeks to bring the project plan back and an implementation team will be assigned. I also suggest that individual performance reflect the team performance so everyone has a stake in the game. The teams I’ve worked with have delivered cost improvement, process improvement, risk reduction and in many cases, increased shareholder equity.

When complete, I suggest the executives reward the team. They are normally surprised and many have asked me what should the reward be. I always say anything that recognizes that the team worked on the project in addition to their regular job, fostered collaboration and brought extraordinary results to the business. The reward is never about money, but always about a recognition that there was a major contribution to the business.

One CEO arranged for the team members and their significant other be picked up by limo and treated to dinner at the best restaurant in town. A small token of appreciation was given along with participation of the executive team. It’s been several years, but the team still talks about how they were recognized.

The company had many volunteers to join teams and make a big contribution. It’s best to understand that rewards like this bring loyalty and incentivize team members and other employees to be part of success. It’s a small price to pay for the benefits that are gained by collaboration, communication and success.

How do you reward good team performance?

Things I am thankful for in selecting procurement and supply chain as a career choice

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This week I am looking at my life and recognizing the things I am thankful for:

  1. I’m in a career that has taken me to all parts of the globe, provided me the opportunity to meet great people, create lifelong friendships, develop a strong network and develop teams that are the leaders today.
  2. I am thankful that the work is dynamic, fast-paced, intellectually stimulating and challenging.
  3. I appreciate the many the business leaders and chief executives that have had a major impact on forming my business acumen.
  4. I respect the mentors who provided guidance throughout my career.
  5. I am thankful for the knowledge to impact businesses, create transformative change, drive cost and value improvement and assist in building tomorrow’s leadership.

If you are considering a career in procurement and supply chain, it is a great time to do it. If you’re already in this profession, make the best of your opportunities; it’s a great time for personal and career growth.

I hope everyone has a great holiday.

Low Management Expectations Lead to Poor Performance

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Last week I attended the Zycus Horizon 2016 conference and was reminded of a conversation I had early in my career with a Chief Executive of a major food company. I’d completed a current state analysis of the business and needed to report on the team’s performance. Procurement’s performance was poor with limited cost improvement, poor coverage in volatile commodity markets and lots of complexity as the team had excessive spot market transactions, no risk analysis and limited supplier management. After reviewing the results with this executive, he was obviously aggravated and demanded to know who should be fired!

My response was a complete surprise to this executive; I told him that management’s expectation was low, there were no targets for cost improvement, no requirements to hedge commodities to protect the plan, limited engagement with the supply base, no requirement for innovation or value. The CEO paused and said, “I guess I should fire myself.“

5 Things that CEOs and CFOs should expect from the procurement team:

  1. Cost management
  2. Value Management
    1. Supplier innovation
    2. Speed to market
    3. Exclusivity
    4. Improved warranty
    5. Improved cost
    6. Continuous improvement
    7. Supplier investment
    8. Complexity reduction
    9. Business strategy alignment
  3. Supplier relationship management
  4. Internal and external collaboration
  5. Supply chain mapping, audit and risk management plans

It is unfortunate that Procurement’s past haunts its future ability to be strategic. I believe that value extraction will be the key to procurement leadership in the future. Is it better to gain a few cents on a product or be the first in the market? Is it better to save a few cents on refractory bricks in a glass furnace or develop a brick that extends the life of the furnace one year? It’s time to raise the expectations for the procurement team and deliver the performance that adds to shareholder value.

Are your expectations getting in the way of success?

Photo: My team manager Cubs Hall of Famer Andre Dawson helping set my expectations before my next at bat at the fantasy camp championship game. I was hitless at that point, but after Andre changed my focus, I got a hit off A’s Hall of Famer Rollie Fingers!

Pricing Decision: Competition or collusion?

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Have you ever read something that made you go “Hmmmm”, then sent you on a what-if thought journey? That happened to me this morning when I read the most interesting HBR post How Pricing Bots Could Form Cartels and Make Things More Expensive by Maurice E. Stucke and Ariel Ezrachi. The article focuses on big data dynamic pricing and bots. The authors suggest that algorithmic collusion is possible by data analysis, the speed of dynamic pricing and probability predictions.

The current law The Robinson–Patman Act of 1936 (or Anti-Price Discrimination Act, Pub. L. No. 74-692, 49 Stat. 1526 (codified at 15 U.S.C. § 13)) is a United States federal law that prohibits anticompetitive practices by producers, specifically price discrimination. In 1936 the authors would not have dreamed of the degree of information collaboration, speed of response and ability to instantly provide global dynamic pricing. In April 2016, The White House issued an executive order and report on the state of competition in the U.S. It is interesting to note that the report focused on the decline in competition in the United States and identified several signs of competition decline since the 1970s.

When we think of artificial intelligence, bots and learning machines, it’s not hard to imagine a time where the probability of collusion is in our future. Since existing loss depends on humans and trust, this will be a whole new area requiring some governance. The HBR article goes on to say that algorithms to machine are somewhat neutral, they don’t generate fear or intimidation nor do they disable the opportunity for the machines to collaborate or collude.

It’s interesting to think that pricing decisions in the future are likely to be made by machines with sophisticated algorithms. As an observer, I wonder how long it will take the legal system to develop governance. It’s not difficult to understand how machines with logic and no fear of retribution can be programmed to quickly align prices and impact markets. This is an interesting development in the current space that I had thought of before. I’d be interested in hearing the thoughts of others.

Technology advancement or opportunity to collude–what do you think?