10 Megatrends for Supply Chain Management—where will you be in 2020?

srm chain

Developing Strategies for Success

2015 is becoming the year of the merger, which means industry consolidation, megamergers and industry consolidation across most supply chains. This trend is driving many companies to develop exclusive, integrated, competing supply chains. Companies that have advanced this practice are Apple, Samsung and Toyota with end to end integration serving the final customer. The key drivers of this type of supply chain are cost transparency, value creation, integrated business systems and innovation. Is your company on top of the trends that shape your supply chains?

To gain control of supply chains, you need to have a good understanding of the trends that will shape supply chains in the coming years. The 10 megatrends I’m seeing are:

  1. Supplier relationship management is becoming a core competency
  2. Value creation is more desired than price management in the future
  3. Innovation transfer is required for the success of the entire supply chain
  4. There is a movement toward portable manufacturing
  5. Contingent work forces are becoming more prevalent in business
  6. Internal and external collaboration is a business requirement
  7. Business strategy alignment will be required between all links in the supply chain
  8. Distribution, logistics and asset management will be a bigger priority
  9. Life cycles are becoming shorter
  10. Supply chain and manufacturing agility will be required to dominate competition

The supply chain management function has been evolving to keep pace with the changing trends. I’ve seen many companies struggle to keep up—those who make the investment to develop skills and improve processes succeed. The diagram below shows some of the key trends that have impacted and evolved supply chain management.

Evolution of SCM

As I see it, it is essential to move from a customer/supplier relationship to an integrated supply chain focus. While some companies have made the leap and lead their industries, others are still back in the price management focus.

Can you make the leap?

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

You’ve tied the knot; is it effective?

Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”

Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.

Characteristics of Ineffective Sole Source Supplier Management

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success

While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.

To become effective with strategic supplier relationship management:

  • Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
    • Speed to market
    • Exclusivity
    • Innovation
    • Speed of response
    • Joint customer and supply chain integration
    • Principles around cost transparency, margins, and investments
  • Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
  • Create joint value targets and incentives for both sides.
  • Develop closer business integration.

With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.

The Future is Now

6 Steps to Acquiring and Delivering Value

value

The market destroys companies that fail to deliver value!

Business success is the result of superior performance of a product with extraordinary levels of service and compelling emotional value sold at the most leveraged price. Without fully understanding the supply chain, value proposition and markets, this cannot occur. Executives in most industries are adapting to shorter product life cycles, rapid commoditization of once differentiated products and weakening of prices by customers with leverage. The strategies and operational initiatives that delivered value last year are losing their impact today.

What does it take to acquire and deliver value? In my experience, the conditions for success are:

  • The business and supply chain are aligned to deliver superior customer value.
  • Knowledge and capability exists internally (in the company) and externally (in the supply chain).
  • The focus is on products where only a small fraction of the value is being deployed (thus making it a prime target for renewal development and leverage).
  • Value must meet customer needs, stakeholder needs and shareholder needs.
  • Value must be defined, which requires a detailed understanding of the relationship between price and functionality of products and services.
  • The total organization and supply chain must buy in to the value strategy.

The combination of functionality of product or service offered to the customer (the value of utility), the price they will pay and the emotional impact (the value of esteem) results in true value. It is inevitable that companies will need to integrate and align the supply chain to meet business objectives and achieve success.

What are the six steps to achieve these conditions for success in value optimization?

  1. Assemble expert teams to define future markets for their products and services and develop plans to dominate them.
  2. Define strategies based on differentiation, innovation and cost leadership.
  3. Assess the strategic capabilities that need to be resourced, developed, protected and leveraged ahead of competition.
  4. Exploit the market value of intellectual capital.
  5. Invest in developing internal teams and strategic supply chain partners.
  6. Define and extract value.

When looking to suppliers to acquire and enhance your product’s value, it’s important to understand that acquiring and delivering supplier value does not rest solely on the procurement or supply chain teams; it is a business-wide process. Without a forward business strategy, investment, alignment and business-wide participation, value will not be optimized for your company, your suppliers or your customers.

How will you ready your company for the challenge ahead?

Getting to NO! – 10 Tips to Improve Tactical Negotiation

getting to no

I have always thought that “Getting to Yes” by Roger Fisher and William L. Ury was one of the best negotiation books ever written. For my business clients (and in my personal life) I add “getting to no” as a technique for tactical negotiation.

One of the most interesting things about Americans is in many cases they’re reluctant to ask for what they want. Whether it’s fear of the other party saying no, worry that they’ll be seem unreasonable or fear of embarrassment, it’s enough to minimize their expectations and sub-optimize any opportunity they may have for improving the deal. Not only should supply managers ask questions, they should set and maintain high aspirations.

A few months ago, I worked in a small food manufacturing company on a project to significantly reduce cost and increase value. A cross-functional team quickly learned that by preparing, understanding the markets, their suppliers and asking enough questions, they were able to build the arguments to support cost and value improvements. By planning to ask questions until they “got to no”, they were able to determine the best opportunities without disturbing the supplier relationship. The result of planned “getting to no” was reduced product cost by 7% with a minimum of resistance in just three months. The savings dropped to the bottom line, which greatly enhanced the company’s profitability. They were amazed by what “just asking” for additional value until there was no more to be gained delivered to their business. All of the parties left the negotiations feeling satisfied with the deal.

Ten Key Tips for Tactical Negotiations

  1. Open the negotiation with high aspirations and maintain your demands throughout the negotiation.
  2. Remember that both parties are at the negotiation table to make a deal.
  3. Always enter a negotiation with research, a plan and a controlled argument from the first contact.
  4. Create multiple options to present to stop the negotiation from getting bogged down.
  5. Use your ability to influence and persuade and switch up methods of persuasion.
  6. Months before the negotiation, manage the other party’s expectations through a series of expectation management messages and events.
  7. Stick to your demands and give few, small concessions.
    Always calculate the cost or value of each concession and build a concession-trading list (if you do this, then I’ll …).
  8. Keep the negotiation focused on key issues, putting minor issues on the back burner.
  9. Don’t just hear or anticipate what you will say next, actively listen and use questions to probe and gather data.
  10. Never respond to pressure and keep pressing for all the cost and value opportunities you can get.

By using these tips, you can dramatically improve your tactical negotiations. While you will still be getting to yes, you will also leave confident that you did not leave anything on the table. Remember, these techniques are for TACTICAL negotiations which occur when you have many suppliers to choose from, there’s a competitive market and a lot of money and value are at stake. For strategic negotiations, you’ll require a more principled approach, which is a topic for another time.

Good luck and don’t forget there is no opportunity for success if you haven’t made the appropriate preparation and plan. If you are working with a team, brief the team, establish roles and practice. While many of us manage very busy schedules, prep in this area has a high return on investment.

Are you afraid of “getting to no?”

Hostage Negotiation –What can supply management learn from the FBI?

hostage

I read an interesting article from one of SourcingChick’s favorite blogs (Eric Barker’s Barking up the Wrong Tree) on how hostage negotiation gets people to change their minds. The more I thought about it, the more it applied to what sourcing people do every day. The article points out six key elements to success.

Ask open-ended questions

This is something that I have done and witnessed for years. Anyone who has participated in the negotiation classes I have taught knows it’s a key technique I encourage everyone to get better at. In reality, we usually don’t want the other party to answer a question with a yes or no. In negotiation the skilled negotiator is effective at open-ended questions striving for understanding the key issues and interests of the other party. By understanding the issues and interests, you can structure a deal that marries the interests of both parties. Think of the Colombo character in the old TV series, “Just one more question.”

Silence and Effective Pauses

Rarely does anyone like silence and pauses, but for the skilled negotiator these are some of the best tools in our toolbox. These techniques encourage the other party to continue dialogue. A pause can be used when emphasizing a point. In the hostage article, silence and pauses are used to diffuse when the other party is highly emotional. This works because it is difficult to sustain a one-sided argument.

Minimal Encouragers

These are brief statements to acknowledge to someone that you are listening and paying attention. It is words like yes, OK and I see. Active listening in negotiation is the core skill of any negotiator whether the negotiation is tactical or strategic. It is not just hearing or thinking of your next statement. It is hearing, listening and giving feedback.

Mirroring

This technique is one that again shows your empathy and listening skills by repeating some of the dialogue that you have just heard.

Paraphrasing

This technique is where we demonstrate that we heard and understand what our negotiation partner said. This is best done by repeating what the person said in your own words. I think it is a great way to insure that you are onboard with what has been said and clarify any misunderstandings or miscommunications.

Emotional Labeling

The FBI suggests that you give their feelings a name. This shows you identify with how the other party feels. Statements like “you seem pretty hurt about being left behind” or “it just doesn’t seem fair” are examples of emotional labeling.

Overall these are clearly skills that will aid in any negotiation. The core skills from the FBI are active listening, empathy, building a rapport, using influence skills, and creating behavioral change. I think this is a good process for procurement managers who are involved in a tough negotiation. While I have taught these skills, it always good to keep them up-front in your challenging negotiation.

We can learn a lot from behavioral negotiation!

Supply Chain Failure – Can it happen to you?

tricycle

What can go wrong?

In my career I have witnessed supply chain disasters that resulted from lack of knowledge or poor planning. You may be thinking that knowledge and planning are the cause of most failure, so you know this won’t happen in your company. Let’s look at one example to see if you may have some of these same conditions in your supply chain.

A few years ago I was working with a firm that made survival gear for boaters. They had a big concern because one of their competitors had made the move to global sourcing and they needed to find a low cost supplier to remain competitive. This client called me in when they had sourced their goods at a factory that they hadn’t seen, had no relationships and were in danger of missing the entire boating season due to poor specifications, communication, inferior product and several missed deliveries.

Failure 1: Offshoring makes it extremely difficult for firms to manage and monitor supply chains.

While it is often convenient to use a trading company as a sourcing agent, it has the potential to put your company at extreme risk. It is essential to conduct required due diligence. You can’t be 100% sure of who the real supplier is. While it is an expense, failure to visit to the factories, create personal relationships with the seller and set up third party monitoring of production, is a failure of best practice. It would be a catastrophic event to discover a subcontractor with unethical practices, child labor, environmental and other issues was named as a source of supply for your company. One of my clients in the metals business outsourced its Asia procurement to a third party (paper manufacturer); the result was a disaster. Not only did the company not understand the technical requirements, they had no vision of the buying company’s ethics and corporate social responsibility programs.

Failure 2: When sourcing globally, companies must build the same relationships and subscribe to the same level of research on the supplier as they do domestically.

Many companies are driven to global sourcing to achieve lower pricing, but cost pressure can lead to compromising quality, performance, TCO and ethics.

Failure 3: Maintain a focus on all aspects of the total cost of ownership.

Initial pricing may be higher, but sometimes the higher priced item provides higher efficiency, productivity and throughput, lower warranty claims and overall value increases. Overall, while we all work to achieve cost and value improvements, we should work to achieve best total cost sourcing rather that price sourcing.

These three examples are ways that things can go wrong. Total cost is not a novel concept, but it is rarely used because people don’t take the time to analyze what they buy and put the key metrics in place to show that they are sourcing best value!

Are you covered in these 3 areas?

Moving into the C-Suite

moving up

You’ve made it! You’re now a CPO!

In last week’s blog, I discussed the short tenure of the CPO—what does this mean if you’ve just moved up to CPO? A recent McKinsey study focusing on executive transitions indicates that nearly half of top executives say they were not effective in earning support for new ideas when they moved into the C-Suite. One-third admitted that they have not successfully met their objectives during their tenure. While there is no predictor of success in a new role in the C-Suite, this blog is designed to provide some keys to success.

Many individuals want to start adding value quickly and make immediate changes; it could prove to be a career-ending mistake. The CAPS Research CPO study I mentioned last week and the related Korn Ferry Institute report highlighted the CPO’s tenacity in facing complex problems and ability to be calm and cool in a crisis. You know that procurement or supply chain professionals develop these skills through experience, so remember this is a strength that your fellow C-Suite peers can rely on. I’m guessing you don’t want a crisis now to show these skills, so following the Deming model of understand, plan do, check and act is a good recommendation for anyone taking on this new role. In the first hundred days, the new CPO should learn the business, business culture, political dynamics and pet projects of your other colleagues in the C-Suite.

It would be wise to evaluate the team and develop an assessment of the team strength, weak links, overall technical and relationship competence and develop a current state analysis. It always helps to get some meaningful metrics, benchmarks and a baseline of others in the industry. When comparing these performance indicators to your new organization, the gaps in team strength, organization and process will become apparent. Getting the team aligned to a shared vision, direction and focus will make your transition easier.

Developing a plan and getting input from your colleagues and stakeholders will assure your success when you present a comprehensive plan. The plan should include key activities, investment required, return on investment, key performance indicators, timelines and milestones and resources to be required and the change management process you will use to accomplish transformational change.

One thing to bear in mind, a transformational change of this magnitude normally takes about two years. If you make immediate changes without the preparing management and without the presentation of a complete program, you will not be considered part of the team. It’s always tempting to exercise your power and change things to show that you are there doing something, but it will be a disaster in the C-Suite.

The McKinsey study indicates that executives with the most successful transitions need more than 199 days to adapt to a new role. The four keys to success are:

  1. Build a plan focusing on internal alignment and the highest priorities of the business
  2. Create a plan that accommodates the business dynamics and culture
  3. Assess your team, understand the strong and weak players and get a perspective
  4. Every business has a business style, adapt to the style in the business.

You have made it, you’re in the game, make the right moves.