Why Companies Must Map Supply Chains

It is interesting to poll a large audience to see who has a supply chain risk strategy.  It’s no surprise that all the hands go up indicating that a supply risk strategy exists and even more interesting to see most of the hands go down when asked how many companies go beyond tier 1 suppliers. The surprising fact is that we do a great deal of due diligence when selecting the suppliers, but the reality is that the risk does not always exist at the direct supplier level.  A few weeks ago, I was working in the computer industry with a client who had just mapped the supply chain only to find that all the suppliers had a common source on a component three levels downstream in the supply chain.  Without this knowledge, the client and industry had an extreme source of undocumented risk.   I’ve heard all excuses for the inability to map supply chain and excuses range from our supplier will provide that data, supplier say there supply chains proprietary, we don’t have the manpower, and it’s difficult.

I recently started working on a project to develop programs for forced and child labor in the supply chain and, based on my research, many industries and companies have extreme exposure to reputation risk.  Thinking back to my experience with commodities and food ingredients, apparel, fishing and mineral categories, there should have been a detailed audit of the supply lines.  I used this experience when I coauthored the book “Transform your Supply Chain: Releasing Value in Business” in 1998, which is all about preparing for the changes in supply chain and includes a detailed audit to help companies audit the chain. I update the surveys in that process continually, which now include corporate social responsibility, cybersecurity and a shared responsibility across the supply chain that wasn’t a concern 20 years ago.

I think it’s time to get serious about mapping and auditing the supply chain. No longer can we tolerate a supply base that does not feel the need for mitigation of supply and reputation risk across the supply chain. Here’s a simple process to follow:

Much of the mapping can be developed in the survey. It’s essential to identify critical supply links and assure that there are no issues in the downstream supply. While I understand the constraints of manpower and budgets, the cost will be a fraction of the cost in having a significant supply loss or damaged reputation from a social issue.

 Can you afford not to map and audit your supply chain?

The Missing Link: Why Procurement Competency Assessments Alone Fail to Make the Grade

Don’t get me wrong–as one of the original developers of the on-line procurement competency assessment in 2004, I am still a strong advocate of the process because it provides a directional compass indicating where a team’s skill should be developed. The problem is that many companies offering training and development have limited knowledge concerning team dynamics, industry specialization and capability of the team to deliver on the mission and vision of the procurement leader.

High performing teams are comprised of individuals that have the technical procurement competency combined with these attributes:

  1. The ability to influence
  2. Effective communication skills (oral and written)
  3. Collaboration and relationship skills
  4. Intellectual comprehension
  5. Process skills
  6. Creativity and Innovation
  7. Drive and energy
  8. Curiosity and ability to test the boundaries
  9. Planning skills including ability to correct the course of action when necessary
  10. Financial thinking

In the past 25 years of coaching, mentoring and training thousands of procurement leaders, I’ve learned a few things. Personality is a key driver in performance. For example, to be effective, procurement folks should be curious and a little like the Columbo character–always questioning. The best procurement people question specifications, cost, process, geography, business requirements, supplier selections, performance and everything in-between. If you’re naturally curious, this comes easy; if you accept information as facts, questioning is a learned skill.

I have conducted face-to-face assessment centers to test for overall competence and it has been effective in recruiting. I am now working on a new model that combines technical skills with personality attributes online to help leaders build high performing teams.

Are you content with your assessment?

The Diminishing Value of the Sales Representatives in a Self-Service World

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This week I read that Wendy’s has ordered 1,000 Kiosks to replace workers at 1,000 of its store locations. Lowes building supply stores have been trialing customer service robots since 2014 and now are rolling out LoweBots in California to handle simple customer requests and provide real-time inventory monitoring. This made me think; if retailers are replacing their customer-facing sales teams, what is the future of sales representatives to industrial buyers? The more I research, the more I realize the future is grim for the old-style sales person.

To challenge my thinking, I asked a group of purchasing professionals in the electronics industry their thoughts on the topic and the results are not surprising. Many said that they have little time to devote to meeting sales people and they feel no need to spend time and effort on a conversation about products that they can see and evaluate online.

Forrester research forecasts over 1 million salespeople involved in business to business transactions will lose their jobs to self-service e-commerce by the year 2020. The procurement professionals I polled would rather research and buy online than through a sales representative. Many are demanding that their suppliers improve and automate the sales/purchasing process. No doubt this is a reflection of how we’ve been spoiled as consumers by the instant gratification of online buying with same or next day delivery.

There is hope for the sales representatives if they can become consultative, offering solutions that provide information and value. This requires the representatives get new training, understand the technical aspects of their products, innovate, solve problems and bring solutions that add value to the customer. Another essential element is that the sales people become a trusted advisor working with the customer’s organization as a quasi-team member rather than an external, uninformed contact person.

This is a tall order for most old-style sales representatives and, unfortunately, many won’t make the grade. The days of shooting the breeze to gain a relationship, golfing and lunches are long gone. Most procurement pros have limited time, increased requirements for revenue generation, speed to market, cost and value improvement, scarce resources and a global footprint. Time management is critical with no time to waste.

Are the days numbered for the traditional sales representative?

The best revenge is success!

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What still resonates with me 10 days after the Super Bowl

Yes, like many of you I’m adjusting to the gap between the end of the football season and the start of baseball. This year, though, I’m still thinking about the Super Bowl and the leadership it takes to succeed in adversity. While faced with adversity, several players in the Super Bowl had been cut from their former squad’s mid-season and, of course, Tom Brady was suspended for 4 games. Against all odds, after a blowout 1st half, the Patriots team maintained a steady head and won the game.

I listened to a Terry Bradshaw interview with Tom Brady about leadership and it really made me think. His attitude was incredible. He indicated as a leader you are the one person that can motivate he team, if you persist you will succeed, and the team will believe that they will succeed. If you come to the huddle defeated and down, the team will also reflect that feeling. The team executed a flexible strategy, stayed motivated and overcame unbelievable odds.

The leadership lesson we can all take away is that a steady leader with a flexible strategy, motivated team and steady execution of the strategy will succeed against all odds.

The best revenge is success! Congratulations to the Patriots!

Are you down for the count or on a steady course to win?

Negotiating with Consultants – the insider perspective

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In the indirect category one of the tricky negotiations is consultants. In many cases, they are brought in at high levels of the organization for their specific expertise. Often they have already been awarded the job and are ready to start the assignment with the contract being the cleanup details. Has this ever happened to you? In this blog I’ll give you hints to improve negotiations with consultants.

The types of consultants will vary by specialty and market. It’s important to understand that all consultants are not strategic. Let’s look at a way to determine types of consultants.

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In Pillars 1 & 2, the power rests with the hiring company and can be tactical in nature. For Pillars 3 & 4 the consultants often have the power and the negotiations must be more strategic, outlining the principles around the engagement and the relationship. The larger firms relate fees to the value perception of the customer rather than a cost-based formula. The consulting firm typically deals with the prospective customer’s senior management and provides several options for solving business issues. Many of these options will be conceptual, leaving the project details open to be negotiated. The key cost drivers for the consulting firm are margin goals, staff utilization and opportunity cost, which are presented to the prospective customer as staffing for the project and timeline.

Pricing methods
The decision on pricing methods depends on the nature of the agreement and whether a performance element is involved. This can also be tackled on an assignment-by-assignment basis. The options for pricing are to develop a structure not linked to performance or link consultant performance to milestones and deliverables.

Options include:

-Pricing not linked to performance. Approaches include:

  • Hourly rates, daily rates, weekly rates, monthly rates
  • Differential rates: partners, seniors, juniors
  • Fixed fees: annual, monthly, weekly, project [turnkey contract]
  • Retainer fees

-Pricing linked to performance. Approaches include:

  1. Performance lump sum pricing—the parties agree a charge for work that will achieve a specified target. The service provider works whatever hours are necessary to meet the target.
  2. Target pricing—the parties agree a price for performing a task or for meeting a target based upon estimated days at a nominal daily rate. A sliding scale may be applied if the actual days are more or less than estimated days:
    1. Fewer days warrant higher per diem rate
    2. More days warrant a lower per diem rate
  3. Performance fee—the partners agree a mix of charges between daily/project rates, retainer fees and a performance fee based on an agreed quantum, linked to specified deliverables.
  4. Milestone based fee‒A fixed fee based on a retained with milestone payments and performance payments based on deliverables is achievable, although the consulting firm may resist this option.

The consultant may offer a performance only fee since some managers like for the consultant to have skin in the game, but there is usually a dispute at the end of the assignments about who had the idea, when was the idea generated, the ideas the company does not want to implement and who ultimately has accountability for either product or supplier failure. One of my assignments generated over $400,000,000 in savings; if there had been a 30-40% gain share (the typical rate), the client would have been unhappy with the payment even though the value was achieved.

Key negotiation tactics
Staffing the project:

The first consideration is to understand who is staffing the project. The negotiator must dig into the background of each consultant and understand their capabilities roles, accountability and responsibilities. It’s essential at the start of the project to define what work will be assigned to each level of consultant. It’s also important to negotiate the role of the managing consultant and the time that will be spent on the project.

Caution–Bait and Switch: One thing that some larger consultants do is start the project with a top-class team then remove the team and replace it with lower level people once the project has started. It is essential that the negotiator insists and documents that the players that start the project will remain through to the completion of the project.

Pay for Performance:

The key part of the program revolves around the project scope, milestones, deliverables and time line. All of these must be detailed in the scope of work (SOW). The negotiator should develop a series of progress payments and incentives for meeting the project deliverable rather than a time and materials contract. The goal of any successful consulting assignment is one where the deliverables are met and the company succeeds based on the work done. The negotiation is all about achieving value for money and performance.

Caution–Resistance to performance payments: Many consultants are not held accountable for meeting all of the project deliverables and will extend timelines with scope creep as a way of increasing revenue and finding other areas to extend their longevity in the business. Milestone and performance payments keep the consultants efficient and focused one the task and deliverables at hand.

While we focus on fees, it is much more important to quantify the objectives and deliverables at the front-end of any assignment. Unfortunately, the stakeholders are trying to quickly address a business issue and are unlikely to want to dig into the detail. As procurement professionals, it’s our job to educate and influence stakeholders to ensure that the service being provided meets the expectations of the company at the agreed fee rates. Performance payments and a team that remains with the assignment from the start will take you far.

How do you negotiate with consultants?

Made in the USA vs. Free Trade – it’s complicated

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While watching the news this week, my wife Linda asked me “Are you a true believer in free trade?” As I thought of a response, I was reminded of why manufacturers began to leave the USA. Yes, many were chasing low labor, but the reality is that many companies were chasing quarterly earnings while operating out of post-World War II factories with limited investment. Abroad, the companies were investing in new plants with updated capital, automation and driving low manufacturing cost as well as having low labor costs compared to the US.

In my corporate procurement and supply chain career, I’ve worked for organizations that had short term focus, lack of (or misdirected) investment and poor strategy. Unfortunately, some no longer exist. The point is that tariffs and duties on imported goods alone will not save US manufacturing. Being the low-cost producer involves investing in the future and developing sound business strategies; that is the key to surviving and thriving.

Free Trade will drive buyers to the low cost, efficient suppliers wherever they are. The high cost, inefficient suppliers can be propped up by protection, but are not likely to survive in the long term. Some supply chains, like the electronic industry, have made the long-term investments elsewhere and have already achieved technology advances, low cost and may never return to the US. The automated factories that return will require different employee skillsets than the industries that left the US and we may not have a ready labor force if manufacturing is reshored.

As procurement and supply chain professionals, we need to develop all suppliers to be efficient, operate at the lowest cost and invest in innovation and automation. I believe that sound strategies, investment and a commitment to the future will lead to the most competitive suppliers, wherever they are located.

It’s a complicated question:

Do you believe in Free Trade?

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?