Are Your Contracts Ready for a Cybersecurity Breach?


I have just returned from the Zycus Horizon 2015 conference, where I was a speaker. The thing about conferences is that you always learn something and yesterday was no exception, especially when I listened to a presentation by Deborah Wilson from Gartner entitled “Cyber Security What the CPO needs to know.” The thing that I found most interesting in the presentation was that all supplier contracts need specific language about risks, obligations and notifications concerning cyber security breaches. Do your contracts contain clauses that address cyber security?

While reading news headlines waiting for my flight, this one caught my eye: “Average Cost of Cyber-crime in the U.S. Rises to $15 Million.” So today I called a few law firms that I have worked with over the years and all of them confirmed that the fastest growing practice in their respective firm. All were now building new contracts with cyber security language. The Security and Exchange Commission issued guidelines that have gotten a lot of attention as companies build the contract language to protect them.

This is a wakeup call to me; many of my clients are highly exposed as they have not added the new language and contract clauses. I will be adding them to my contracts immediately. In next week’s blog, I will continue with this topic by including advice from some cyber security legal experts.

From the FDA warning medical facilities that they should top using a medication infusion pump that was vulnerable to hacking to the highly publicized security breaches attributed to suppliers (one breach was caused by a supplier’s invoice that included a Trojan), you may not think you’re vulnerable, but anything connected to your organization’s network is a potential threat. My advice is:

  1. sit with your legal team to review what language is needed
  2. rewrite the contracts, and
  3. kill the evergreen contracts–nothing lasts forever!

Are you prepared?

Where have all the ethics gone?

fingers crossed

From time to time I write on procurement ethics, but today I question where the business ethics have gone. In the past two weeks, we’ve seen:

  • Volkswagen’s Chief Executive Martin Winterkorn resigns after it was disclosed that Volkswagen will repair up to 11 million vehicles and overhaul its namesake brand following the scandal over its rigging of emissions tests.
  • Martin Shkreli, CEO of Turing Pharmaceuticals, acquired the rights to Daraprim, which was developed in the 1950s. The drug is the best treatment for a relatively rare parasitic infection. People with weakened immune systems, such as Aids patients, have come to rely on the drug, which, until recently, cost about $13.50 a dose. But when the price was raised to $750 a pill, a more than 5,000% increase, Mr. Shkreli’s brash defense of the decision has made him a pariah among patients-rights groups, industry spokespersons and politicians, making him one of the most disliked CEOs in America.
  • Stewart Parnell, the former CEO of Peanut Corporation of America, was sentenced to 28 years in prison. He had a role in concealing a 2008 and 2009 salmonella outbreak that sickened more than 700 people and killed nine.

It seems that we are seeing integrity breaches in business every day. There is a code of ethics for all business that true procurement leaders have always followed. I believe this is an area that sets apart leaders from the crowd; it’s obvious that these three CEOs lacked the integrity and leadership to do the right thing.

On a personal note, I had a mentor and boss in the early 1980s who gave me some advice and coaching that set a standard for how I operate. When I made a decision in the best interest of my company, several corporate executives wanted me to compromise my ethics and give an unfair advantage to a business owned by someone with political influence. I held my ground and my mentor said “I can’t help you and you may get fired, but there are worse things than getting fired for having integrity.” He also said “Remember, you can never put a price on integrity.” These were wise words and some advice that these three executives either never received or chose to ignore when faced with the choice between profit and principles.

I must not be alone in questioning ethics; this morning’s HBR Management Tip of the Day is Know When to Speak Up About an Ethical Issue. Is it time for your firm to think about reinforcing the company ethics standards and conducting an integrity audit?

Does your reputation have a price?

Breaking Down Barriers in Business


6 key tips to help you succeed

I was intrigued last week with an article in the Harvard business review entitled Jack Welch’s Approach to Breaking Down Silos Still Works by Ron Ashkenas. The article got me thinking about how many times I’ve encountered very rigid siloes in both my corporate life and consulting life.

I am sure that if you’re working in procurement and supply chain management in a matrix organization, especially across different business units in different functional areas, this is a problem for you. The interesting thing about procurement and supply chain in today’s world is that not only do we cross business units and business functions, we also cross geographical and cultural barriers.

Jack Welch, as CEO of General Electric, was convinced speed of globalization and technology innovation required companies to work in a different way. With shorter decision cycles, more employee engagement and stronger collaboration are required to compete in an organization with no boundaries.

When I agree to help a CEO reduce cost and add value on a global category approach, I request that the top management team be involved in creating a steering committee to oversee the projects. When projects are approved by the steering committee, one member of the steering committee must act as sponsor for the project.

Another essential success factor is creating a time boundary on the project. Typically, I allow eight weeks for the entire project. The team works together for four weeks and gives an initial report to the executive steering team with a conclusion for weeks later.

The team is not responsible for the implementation, but must identify the opportunity and secure the savings. What I found through this dynamic is that the team does not want to review failure with the senior management team. Typically, the aspirations for the ROI on the project are high and the results are always achieved. It makes sense that no one wants to report bad news to top management as it could be a career limiting move.

I also establish rules and governance for the project where the steering committee takes on the role of removing roadblocks. Needless to say, when projects are presented and endorsed by the senior management of the company, the opportunity for stakeholders to block progress is greatly reduced. It is also necessary to consider establishing budgets for travel conference calls and other miscellaneous expenses. This heads off a lot of the issues around individual budgets and travel expenses.

Finally, I advise the senior management of the company to celebrate success. In one case the CEO the company had an opportunity to reduce his cost by over 20%. When discussing what would be a great success he decided to take all of the team members and their spouses to the best restaurant in the city. They were picked up by limo, they spent the night and were given a small token of appreciation. Now, five years later, the team still talks about that night and there are abundant volunteers at all levels of the organization who want to be on projects. It is now a cultural norm at this firm.

Six tips for breaking silos

  1. Build governance process for the project that includes a very senior level steering committee and sponsors for each project.
  2. Empower steering committee to approve projects, provide input, and remove roadblocks.
  3. Establish a cross-functional, cross-business team assigning responsibility, authority, and accountability.
  4. Set a rigorous timeline for the project.
  5. Establish a budget for an initial meeting to develop the mission, agree the vision and drive the project.
  6. Celebrate success.

I’m sharing these tips because they have help me assist companies in savings projects that exceed hundreds of millions of dollars. If a company is not willing to provide the right governance, processes, budget and commitment to cross-functional/cross-business global teams, I won’t accept an assignment, because breaking down the barriers is difficult to do.

Can you knock down the barriers?

Managing Procurement in a Digital World


5 tips for operating in a digital world

Many of you may find this hard to believe, but years ago the buyer’s best resource was the green, multi-volume set of the Thomas Register of American Manufacturers that was proudly displayed on the credenza. This was THE way to search for new suppliers. Today, you recognize and their web-based platform for supplier discovery. Things have come a long way since the hardcover green volumes, but I see many companies who, while using web-based searches, are still basically operating in the same way as the “look up a supplier for my item” process. Procurement exists in a world where social media, cloud computing, transition to mobile devices and the internet of things can simplify processes and free up valuable time to focus on more strategic, value adding work.

E&Y in its analysis of Megatrends 2015 reports that “Digital disruption is taking place across all industries and in all geographies. Enormous opportunities exist for enterprises to take advantage of connected devices enabled by the “Internet of Things” to capture vast amounts of information, enter new markets, transform existing products, and introduce new business and delivery models. However, the evolution of the digital enterprise also presents significant challenges, including new competition, changing customer engagement and business models.”

While the E&Y report highlights many megatrends, I want to focus on the digital impact on the procurement leader of the future. It’s obvious that the future for procurement will include connectivity from customer through to the lowest level supplier. It’s also not hard to envision models where computers on routine purchases have the ability to solicit quotes for business, analyze the quotes with decision-support artificial intelligence, place the order based on key rules and complete the transaction when goods and services are received. It’s also not hard to envision the costs and benefits of such systems, leaving procurement to develop longer-term strategies, supplier relationships, new products and work across the supply chain to deliver increased levels of value.

Here are five tips for managing procurement in a digital world:

  1. Align all low spend, low value categories so that they can be managed automatically.
  2. Develop order points, Kanban, blanket order releases, etc., so that they can be automated.
  3. Think about developing intelligence for timing, decision-support and rules for automating the RFX process.
  4. Automate supplier performance reporting and analysis.
  5. Reduce complexity of low spend, low value expenditure by establishing controls and removing human touch points.

These tips are just some of the things that procurement leaders should be thinking about as more and more human work is being transferred to machines and software. Automation of purchasing should be no exception!

Are you automating processes?

Interest Rates and Cost Control—it’s been a wonderful life


10 tips to control costs

This WSJ headline caught my attention: Fed’s Fischer: ‘Good Reason’ to Think U.S. Inflation Will Move Higher.  Vice chairman says Fed shouldn’t ‘wait until inflation is back to 2% to begin tightening.’  This should serve as a warning to all companies that the good times may be nearing an end and we may be experiencing the switch from a buyer’s to seller’s market.

Should interest rates rise, many suppliers and supply chains will feel the significant impact of severely extended payment terms. We’ve been working in an economy where the cost of money is relatively low; as interest rates rise, suppliers and the entire supply chain will be impacted by added costs to support the extended terms. As these costs increase, there’s an additional risk that the front-end of the supply chain may not be able to fund or pass through increased costs, causing severe supply chain risk.

Sourcing practitioners have basically two options for dealing with cost containment: wait until the supplier increases the price, then react, or proactively create a cost containment plan that involves the entire organization.

Good proactive cost containment plans require these 10 actions:

  1. Improvement of functional inter-site and intra-business collaboration
  2. Monitoring external markets and market pressure for price increases
  3. Forecasting the impact of potential price increases on the business
  4. Reviewing all contracts to solidify current pricing and prioritizing cost containment targets with quantified objectives
  5. Researching market and supplier data
  6. Building a supply chain map
  7. Running risk assessments on the supply chain
  8. Conditioning suppliers against price increases
  9. Building tactics for delay
  10. Deterring price increases

I have been around long enough to experience cycles of inflation and these actions have been proven successful when dealing with inflation. The difference today with the inflationary periods of the past are that the extended payment terms across the supply chain make some of the suppliers extremely vulnerable to the increased cost for money.

Sometimes forecasting the economy is like using a Ouija board, but all signs are pointing to interest rate hikes, hence, inflation. So, should you wait? I see it like this, borrowing a quote from Clarence in It’s a Wonderful Life, “You see, George, you’ve really had a wonderful life. Don’t you see what a mistake it would be to throw it away?”

Are you ready for a Seller’s Market?

Recession – 5 steps to take now

rough road

Are you prepared? What is your plan?

This week has been a week like no other as the stock market reacts to falling commodity prices, interest rate changes and devalued currencies. Bloomberg Business published an interesting article, “China may tip the World into Recession: Morgan Stanley”, that points out that a continued slowdown in the next years may bring global economic growth below 2%. Ruchir Sharma, head of emerging markets for Morgan Stanley Investments, views this as the threshold equivalent to a world recession.

While this is a bold prediction, it should serve as a warning to procurement and supply chain practitioners to dust off and review risk management plans. In any recession, where volumes are dropping, inventories are growing and cash management becomes critical, it is necessary to assure that the supplier network can withstand financial stress.

It’s also wise to do a complete contract review with both leverage and strategic supply sources. It will be smart to assure that the volumes are not overcommitted. In addition to reviewing contracts and volumes, building scenario forecasts can help a company to determine options and strategic directions. Now would be a good time to understand the impacts of currency changes on both the buy and sell side of the transactions. The savvy purchaser will align the supply chain with the impact of the customer’s terms and conditions on currency; in other words, understand the currency risk end-to-end and plan accordingly.

Review contracts with customers, too, to understand what commitments are being made to customers and take the opportunity to solidify some of the future orders in advance. Another practice I recommended, as we approach a potential recession, is business reviews with suppliers and customers.

Economists will argue for many years whether we’re approaching or are in recession. One of the worst things managers can do when the world is dipping into a recession is to take no action. Personally I like the Boy Scouts motto: “be prepared.”

  1. Review and update all risk management plans
  2. Review all customer and supplier contracts
  3. Build best and worse case scenario forecasts
  4. Understand all international contracts adjusting for currency fluctuations
  5. Audit the supply chain

What’s your strategy?

Lower Diesel Prices: 5 things to do now


How fast does your team react to available data?

In Supply Chain24/7’s news yesterday, the headline read diesel prices decline for the 12th straight week. “At an average of $2.615 per gallon, the price is down 0.2 cents compared to last week, with prices dropping a cumulative 29.9 cents going back to the week of May 25, when the average price was at $2.914.” What will you do with this data?

The challenge for the procurement and logistics teams is translating this data into cost reductions. There should be a parade of transportation companies eliminating surcharges and reducing cost, but I’m guessing suppliers aren’t coming to you. Your team should be acting on their plan for value enhancement now. One of the key characteristics of a good cost manager is to constantly monitor the suppliers and the supply markets. While there is no doubt that the fuel cost structure for for all freight companies is declining, they’re probably constructing arguments for other areas where costs have gone up. Customers should be prepared for this and be sure that their cost structure reflects the market changes.

Astute supply chain practitioners realize that, if unchallenged, the logistics suppliers will have the opportunity to significantly improve margins, while their costs are essentially remaining the same. The savvy purchaser will:

  1. Know the impact of fuel on the pricing structure
  2. Ask for the appropriate decrease
  3. Shake up the market with a competitive bid (if suppliers are unwilling to pass along the lower cost)
  4. Develop a longer term hedging strategy
  5. File away the lower fuel price impact data for use in the next negotiation.

What is your plan?