Category Archives: Transformation

Supply chain and Procurement – The Decade in Review and Key Strategies for the Decade Ahead

Current State of Procurement
Working with some of the world’s best companies has given me a good view of procurement and supply chain over the years. As we exit 2019, we’ve made much progress, elevating the importance and status of our profession. Many firms have clearly articulated strategies that deliver year on year price reductions, restructured operations to separate transactional activity from strategic activity, and have designed multiple supply networks to meet the needs of specific market segments.

Overall, as procurement professionals, we have failed to progress developing rigorous category strategies, planning, and fail to optimize the opportunities available from detailed plans and well-executed cross-business/cross-functional business category strategies. Many of the firms I have visited in the last three years are just now embarking on developing a category planning approach. Many companies are still working with a centric, functional approach rather than recognizing that procurement is a business-wide process. Many businesses tend to have an annual, sometimes even quarter by quarter, business horizon rather than a forward-looking multi-year strategy. Many firms have not sufficiently invested to leverage technology to manage the current state and are in no position to look to the future state where data analytics and digital disruption will be a way of life. With robotic process automation, the internet of things, and automation with Artificial Intelligence are considered futuristic, and the reality is that they are here now. Data scientists are in high demand among progressive procurement, and supply chain-oriented companies.

The most surprising thing to me is that most companies do not have detailed maps of the suppliers in the supply chain. For me, this is some of the most critical intel a procurement or supply chain executive must have. It is impossible to have social responsibility, anti-slavery/forced labor, environmental or risk management programs without knowing all the suppliers in the supply chain. Knowing just the suppliers in tier one is not enough.

While we have made significant progress in the past decade, the challenges of a rapidly changing environment will force our firms to have renewed strategies that are forward-looking. The days where we chased low-cost labor around the globe are in our rear view. Far too often found out too late that our source of low labor costs put us at risk from natural disasters, political regulation and was temporary at best as standards of living are on the rise. In all cases, automation offsets low-cost labor. Robots work 24 hours a day, 24/7, never get tired or sick, and quality and productivity are consistent. Another lesson is that many organizations are building facilities close to the markets they serve in smaller footprints, making the supply chains more secure, agile, and flexible.

Strategies for the next decade

  • Enhance category management and develop robust strategies that are forward-thinking
  • Redesign the procurement process with the understanding that is a business-wide process with many owners, not a functional activity
  • Invest in bringing the technology up to manage the current state. Many companies are reluctant to invest in technology. Failure to do so will put the company at a competitive disadvantage and perhaps extinct
  • Build a TCO approach focused on total value. You could be getting low prices but higher production or management costs
  • Develop full supply chain maps of the supply chain along with real social responsibility and risk management programs
  • Provide the procurement teams with a comprehensive business orientation; in the past decade some organizations have compartmentalized jobs. When this is the case, individuals and groups fail to understand the business, company, and business strategies.
  • Manage succession planning and develop bench strength and a continuous recruiting
  • Develop a supplier relationship management program that rewards innovation, speed to market, business alignment and value contribution
  • Develop the individuals and teams in your business. Many groups need a program that goes back to basics and develops the population to build, drive and execute well-planned category strategies
  • Develop and train procurement leaders to look forward and create new processes, systems, and comprehensive business programs to cope with digitization, disruption, rapid product change, and supply chain agility

The changes I have seen in procurement have been challenging, exciting, and thought-provoking. The reality is that we are at the crossroads of change. While you may not agree with the current state of procurement and strategies for the future, I urge you to assess your organization and make a strategic commitment for the decade ahead.

Are you ready for the 2020s?


Back to basics with three R’s

Strip away all the sophisticated software, instant communications tools and reams of data we can now incorporate into our decision-making and a simple truth remains: people are still the key to good procurement, and relationships among people still count.
Chris Jones at DC Velocity reminded me of that recently in a column he wrote about the three Rs of supply chain competitiveness. He says he heard them from a former professor nearly 20 years ago, and they haven’t changed much since. They are:
> Responsiveness
> Reliability
> Relationship
These are good principles to guide decisions about how we use all the procurement tools we have at our command. Will a big data analysis really help us respond quicker to changing conditions or anticipate possible risks? Does the vendor management software package make us a more reliable customer? How do faster communication channels help us build our relationships?
We often assume that whatever is new or “trending” is better, and data can often obscure as well as uncover a truth. So it’s good to have a few basic principles to guide us through all our metrics, and these are three that have stood the test of time.
They aren’t just good for supply management, they apply in general to business — and life.

To Become a CPO, Think Like a CEO

For a number of years we’ve been watching the trend of supply managers to think more strategically, for instance, looking for ways that relationships with suppliers can bring innovations that could increase sales instead of simply reducing costs. The Hackett Group recently released a research alert that confirms that trend. Read it here.
The report is based on an annual survey of procurement leaders, and this year’s survey found supply managers looking past cutting or containing costs to more strategic priorities as expanding the scope of procurement’s influence on spend and tapping suppliers for innovations.
The Hackett Group Global Managing Director and Procurement Advisory Practice Leader Chris Sawchuk said, “We believe many procurement organizations have reached the upper limit of cost reductions possible in categories they are actively sourcing today. So they’re looking for ways to reinvent their value proposition. A key part of this is expanding their influence, and taking a life-cycle approach to category management. This requires working more effectively with spend owners, executives, requisitioners, suppliers, and other stakeholders. It also calls for skills that are outside procurement’s traditional areas of expertise.”
The big idea from this research is that long term success for supply managers comes when they think like a CEO. However, as we all know, if you are stuck in the swamp it’s darn hard to see what it looks like from the mountaintop. To get from here to there it may take investments to raise your skills and those of the team around you. It may take a continuous process improvement approach to the work your department does, and it may take investments in technology to reduce the transaction costs of non-strategic purchases. In short, you may have to start thinking like a CEO of your team before you can align with the CEO of your organization.





Consolidations: More May Not Mean Less

The global economy is at a point now where more companies are considering mergers and acquisitions for various strategic purposes – and one of them is often perceived savings from consolidating purchasing and supply management functions. And while it is generally true that consolidations can generate significant savings, the execution is always harder in practice than it is on the org chart. It’s a case where more does not always lead to less — in this case, lower costs. Here are a few things to consider:

Knowledge is power. Conduct baseline assessments of supply management functions in each location or division. At a minimum there are likely differences in systems. In a worst case, there could be a huge mismatch where one division has a purchasing department fulfilling a purely administrative function while another has a supply management operation that operates at a strategic level working with cross functional teams driving innovation and quick market responsiveness. No easy blending in that situation.

Change is hard. Expect resistance both passively and actively. Some people will naturally prioritize saving their job over saving money for the firm. Others will just find adjustments to new procedures difficult. Create cross functional and cross-location teams to work on projects, and use specific stakeholder engagement strategies to help team members understand and work with each other.

Parts are parts – or not. Not every category of purchase is suitable for centralizing under a corporate purchasing center. What may seem like a commodity may have subtly different specifications for different locations. Analyses of where to source ought be based on the total cost of ownership – not necessarily a simple benchmark price.

Look for the low-hanging fruit. There are often significant savings in indirect categories where the ownership of the spend is dispersed. In your baseline assessment, identify those areas where a quick change can make a big difference. When executive management sees savings it is more likely to provide the support you need to implement more complex, long-term supply changes.

GAO Keen on Strategic Sourcing for Services

According to the U.S. General Accountability Office, the federal government  spent $307 billion to acquire services in its last fiscal year. Did they get good deals on all that work?  The GAO wasn’t so sure, so it turned to ISM, asking for examples of organizations that might have best practices that the federal government could put in place. Obviously, they came to the right place. ISM staff offered a list of supply management organizations that the GAO might interview, and in its report the GAO mentioned four tactics that it found important.
(1) Standardize requirements
(2) Understand cost drivers
(3) Leverage scale
(4) Prequalify suppliers
The GAO remarked that effective organizations did not treat all service purchases the same, and they had to be able to adapt tactics to changing conditions.
None of this should be a big surprise. It did come from “good sources” as it were.
The GAO might not be able to persuade the whole U.S. Government to follow those good practices, but that should not stop you from paying attention to them in your own work.
Here’s the link to the report summary and PDF.
Strategic Sourcing: Leading Commercial Practices Can Help Federal Agencies Increase Savings When Acquiring Services

Dig deep to mine supplier savings

Most companies focus their supply chain improvements on tier one suppliers, not the entire supply chain. That’s a lot like paying attention to just a few categories of spend, and it’s likely leaving opportunities untapped.
The first step in the right direction is mapping your complete supply chain from raw material to delivered product. It’s surprising how few companies actually do that. The usual reasons are a lack of resources and management commitment, or a lack of understanding the value of that knowledge.
If the thought of mapping everything is daunting, select a category where you think there might be untapped value and you have good relations with a tier one supplier or two. Run a pilot test by mapping the supply chain for a single product. If you find an ROI by working through your tier one relationship to others in the chain — you’ve got an argument for more resources to run similar programs in other categories.


Don’t dominate, collaborate

As companies bring smart purchasing strategies to new categories of spend, there is a danger for procurement professionals who are too eager to prove their worth. While management in production or engineering may have become familiar with cross-functional teams addressing a sourcing issue, marketers and other owners of indirect spend often have had very little experience working with procurement professionals except at the administrative level. They are likely to view any involvement as an intrusion into their professional relationships.

Good guidance for procurement staff is to approach those situations with a goal to collaborate, not dominate. Look for small successes to build trust, not home runs in the first few innings. Fred Parkinson wrote a nice piece about engaging stakeholders for our eBulletin last summer.  Click here to read it.

Lean, Green, Global Machine

You’ve heard of carbon dating — but in Japan and the UK at least, consumer product companies have begun rolling out “carbon labels” on what they sell. The labels tell purchasers the amount of carbon dioxide released during the manufacturing, marketing, distribution and likely disposal of the product.  Procurement professionals are adept at looking back through a supply chain — but this approach also has us “forward thinking” through the whole lifecycle of a product.

I think sustainability initiatives are likely to be with us over the long haul. They are themselves sustainable, if you will, so we should be prepared to manage them. One of the basic steps is to establish your enterprise’s standards for evaluating environmental impact. The rise and fall of ethanol is a great example of how an idea for moving away from fossil fuels was tarnished by questions about its overall impact and the pressure it puts on food supplies.

Japan, the UK, and Scandinavian countries are moving quickly to create independent assessments of sustainability. The carbon labeling is just one example. Here in the U.S., we have Leadership in Energy and Environmental Design (LEED) standards for buildings. A Green Restaurant trade group has set up a certification process for “sustainable dining,” and you can look to your own industry groups to find out how they are setting standards for sustainability.
In the absence of industry metrics – you might follow the example of Herman Miller, which set itself these goals by 2020:
•    zero landfill
•    zero hazardous waste generation
•    100% green energy
•    all buildings LEED Silver certified
•    100% of sales from products designed for the environment
Those targets may be aggressive for your company, but they do provide a good framework for prioritizing and measuring green progress. Back them up by planning and executing steps to reach them. Once your own house is in order, you can turn to your suppliers – wherever they are – and negotiate standards for them.
What is absolutely clear is that companies can no longer ship their environmental issues to offshore suppliers. Even in countries where regulations may be lax, watchdog groups are vigilant, and bad news travels at Internet speeds.
The imperatives are clear, but like any transformation, it may not happen overnight. Still, with continuous support, you can turn your company into a lean, green, global machine.

Riding the economic Tsunami

Darwin probably said it best – the fittest will survive. That’s also the assessment of my colleague in the UK, Robin Jackson, CEO of ADR International. If you haven’t seen ADR’s newsletter, this is what he had to say:

“The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours – if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of currency will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability – imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years.

These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.”

Thanks, Robin. We should all bookmark this. Post it on our desktops and build it into our work plan every day for 2009.

Find more articles by Robin and others at our ADI International web site


About ADR North America


ADR North America, based in Ann Arbor has been a leader in purchasing consultancy for more than twenty years.

ADR North America is part of a global group of consultants – ADR International — in Australia, North America, South Africa and the United Kingdom who have worked with over 200 clients in more than 50 countries. Among our clients are many of the world’s largest companies. Our consultants are recognized experts in the field and have authored hundreds of articles and commentaries in professional journals.

Our products and consultancy services have proven their ability to transform global company purchasing operations. We can start with innovative baseline assessments, move on to create and implement purchasing category strategies, and finish by developing staff skills to bring increasing value to a company. As appropriate, our consultants can deliver all or any part of a purchasing transformation. In short, ADR is purchasing knowledge, applied.

24 Frank Lloyd Wright Drive
Lobby B
Ann Arbor, MI 48106
Phone: +1 734-930-5070