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?

Creating the right focus for your procurement team

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10 priorities for procurement

Customer demands are continuing to increase and accelerate. Today, customers expect same or next day delivery of products purchased online and, especially for technology, they expect a constant stream of products that are faster, with more features and longer battery life. This means organizations have had to increase investment in infrastructure, R & D, supply chain, distribution, logistics and, especially, services. So why do so many procurement organizations still have a main focus on driving supplier price? In a My Purchasing Center interview with Chris Sawchuk earlier this year, reduce price and avoid cost was the number 1 procurement objective for 2016 in a Hackett study, but elevate procurement to trusted advisor was close behind. The problem, is that procurement operating budgets were only expected to grow 1.1% this year, leaving little funding for procurement initiatives, even those considered high priority.

Let’s look at headline news about the Samsung Galaxy Note 7’s battery and how procurement’s focus on price and cost could be relevant. Look up make vs. buy and you’ll see most decision trees have 2 main questions (is the capability in-house and is there an intellectual property risk) and a formula for calculating the “cost of make” vs. the “cost of buy.” What might the outcome of inhouse/outsource testing be if procurement’s priorities and focus were more on the attributes of becoming a trusted advisor? In 2013, Deloitte released a perspective Charting the Course – Why procurement must transform by 2020. One paragraph in that report really stuck with me:

“On many levels, “make vs. buy” influence is the ultimate test of procurement’s influence and capability because it relies on being the benchmark and market information clearinghouse, and therefore, the nexus point for all sides of the company in joint decisions. Moreover, it involves looking beyond unit cost, asking questions like “how does a ‘buy’ impact the ultimate end customer?” Further, does this step transfer risk, or actually increase it for the business?  Procurement can play a part in generating the right set of questions up-front as well as coming up with creative solutions on the back-end.”

I believe influence and becoming a trusted advisor can be achieved by focusing on value, especially, through strategic relationships with suppliers.

What should procurement be focused on today to gain trust and influence?

  1. Total value delivery
  2. Innovation capture
  3. Improved agility
  4. Supplier alignment with the company’s business objectives
  5. Alignment with the customer demand
  6. Continuous improvement
  7. Driving supplier performance
  8. Integrating business systems with suppliers
  9. Building the short term, medium and long term strategy for the supply chain
  10. Building key performance metrics and quantifying value capture and delivery

As I continue to assess the current state of procurement departments across the world, I am still astonished at the number of companies that place a high priority on non-value adding transactional activity, have a lack of long term planning and focus most activities on driving price rather than reduction of true cost. There is a need to increase flexibility as product life cycles shorten and customer demands increase. The priorities of increasing productivity, efficiency and eliminating cost and waste sometimes give way to short term thinking and high transactional activity. Management should no longer accept the excuse we are too busy working on price and cost reduction to do anything else. Developing creative options and gaining trust and influence throughout the business require focus on true, value-adding priorities.

Are you wearing blinders that keep you focused solely on price and cost?

Reality Check: The Contingent Workforce is Here to Stay

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Are you an employee or a free agent? In May 2008 at ISM’s 93th Annual Conference in St. Louis, I heard Daniel Pink speak about the “Changing World of Work”. When Pink’s “Free Agent Nation” was released in 2001, there were independent free agents, especially in consulting roles, but the number in comparison to the total workforce was small. While many doubted the disruption of the contingent workforce in 2001 and even in 2008, there’s no doubt of its impact today in everything from how we travel by car to the workforce at Fortune 500 companies.

When you think about it for procurement, it makes sense that an independent agent with experience and knowledge in a category of spend can quickly assess the supply market, benchmark price and cost, develop a strategy, negotiate an agreement and then move on to the next assignment. This leaves the supplier relationship mangers to execute the contract and manage the relationship for the term of the agreement. This year, particularly, the contingent workforce has been a hot topic in procurement media and research. I recommend reading and listening to Ardent Partners research and Contingent Workforce Weekly podcasts, Art of Procurement’s podcasts on the contingent workforce and SpendMatters research and upcoming “GE Digital on the Future of Work” webinar to gain insight on where we are and where we need to be to optimize the “free agent nation.”

For CPOs, the contingent workforce will play an increasing role. While the budget for contract labor will increase, but companies will be released from the burden of taxes, healthcare and insurance costs, and other full-time employee costs. The key to success is to capture expertise in the short term, then have the contractor move on. The CPO can manage more strategic priorities with the right balance of FTEs and contingent workers.

It’s important to understand that the ways we work are constantly changing and evolving. With artificial intelligence (AI) and the internet of things (IoT), it’s apparent that some of the work humans currently do will be replaced through business system integration across the supply chain. We’ve certainly evolved from the days when Eleanor Roosevelt said “We have reached a point today where labor-saving devices are good only when they do not throw the worker out of his job.” Now the work and the labor force has changed – we can see the way forward to work more strategically and drive innovation.

I am structuring my company’s organization to reflect the value and opportunities available using contingent workers. What about you?

Was Daniel Pink right?

Price is a policy and cost is a fact!

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5 Ways Companies Set Price

This is a credo that I have followed since the early 1990s, so this headline in the Wall Street Journal “House Committee Taps Mylan for More Information on EpiPen Price Figures” caught my attention. Suppliers price their products in many ways and it is important for buyers to understand the pricing method as well as develop a should cost model to understand the supplier’s likely margin.

Some of the key methods used to price product are:

  1. What the market will bear – In markets where there is little or no competition, companies can employ a pricing strategy that optimizes profits. This pricing strategy is developed to achieve the maximum price point that will be supported by customers. The supplier justifies this as a way to quickly recoup high R&D or capital costs. Unfortunately, once recovered, the pricing model remains in place until competition is introduced.
  2. Pricing in line with competition – Suppliers typically use market and competition to set pricing levels. While competition works to set pricing levels, savvy purchasers know that in some industries a few of players can work to balance capacity and demand. Industries where there is significant competition use this pricing model.
  3. Value Pricing – This pricing method is typically used in the services industry and is based on the perceived value of the service to the service being offered.
  4. Market penetration pricing – This method artificially sets pricing levels at the lowest profit level possible to build volume and capture market share. In some cases, the supplier may use marginal pricing which reduces the fixed cost burden of the product to stimulate volume. While penetration price is attractive, it is a very short term pricing method.
  5. Cost based pricing – This methodology calculates the cost and adds a sufficient margin to the product. The reality is that only about 25% of the companies use this method.

The key to sourcing success is to be able to understand the manufacturing process or service being sourced, visit the supplier location and synthesize the cost. This is a process where the sourcing professional builds a should cost model by estimating the inputs of the goods or service being procured. Capturing the materials, labor and overhead costs provide a framework to challenge supplier pricing models. I have worked with sourcing teams who have seen as much as 180% margins and others that have validated supplier losses on their products.

It’s essential that every sourcing professional have cost analysis and cost modeling as a core skill set. Without this skill, the individual is working in the dark. I really like presenting the cost model and challenging supplier price. If I am wrong, suppliers will correct me. It is easier to present the cost model and force the supplier to negotiate it up than it is to take the supplier’s price and try to negotiate the price down.

Will you be working with a fact base on pricing?

Does your organization optimize the effectiveness of its talent development program?

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It’s a sad fact that many organizations devote on a large portion of their annual budget to developing their teams, but rarely get the desired results. Often organizations don’t take the time to develop key metrics to measure the change in skillsets, behavior or impact of the training.

While procurement and supply chain training provides best practices and new tools, many organizations fail to embed the learning through a linkage to the business process. Unfortunately, over time, the learning is lost as people return to their daily routines and old processes.

5 things companies can do to improve the effectiveness of their development program:

  1. Create linkage between training tools and business processes
  2. Build metrics and checkpoints to assure that tools are embedded and used
  3. Align all development programs to the industry and company using case studies and real life examples
  4. Build programs on a fundamental and advanced level that add value to participants
  5. Measure and report ROI resulting from the training

Today employees are in an environment where they are multitasking, highly distracted and working in matrix organizations with multiple masters. They resent spending time in a training environment that provides limited value.

To be successful, training must be meaningful, provide tools and value linked to a process that will deliver results and a high ROI.

How effective is your company’s training?