Category Archives: Uncategorized

The Economics of Cheese

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What every sourcing professional should know

When you read this week’s Wall Street Journal story A Cheese Glut is Overtaking America, after thinking about doing your part to assist with the report that every American would have to eat three extra pounds of cheese this year to work it off, did you think about the economic impact and why this story matters to sourcing, procurement and supply chain? There are many lessons that can be learned from agricultural commodities and understanding the economics, especially in strategy development and managing volatility and risk.

During my career I have managed agricultural commodities and I understand the value and role that economics plays in sourcing. Let’s look at a commodity cycle we’ve experienced in recent years. It’s not difficult understand that after a period of drought, many crops fail and grain prices increase significantly. Farmers then look ahead to a tough winter of feeding cattle with the high cost grain, which will have a negative impact on profitability. As a result, farmers send their cattle to the slaughterhouses and cut their losses. As consumer demand remains steady and exports continue to rise, there is little doubt that the limited supply will force prices to rise. As the weather becomes more stable and grain prices fall, it’s natural for farmers to increase their herds of cattle, production of milk (and cheese!), flocks of poultry and grains. This is the easy to understand supply and demand economic cycle.

In this recent cycle, the opportunity to capitalize on the high prices became apparent to many farmers, however, the failure to understand the impact of the high US dollar on exports and the collapse of the export market, has caused increasing inventory levels, plus the time requirements to flex the size of herds and flocks has built up to the glut of some commodities. Gluts, shortages, currencies, pandemics, weather, labor, regulation and government stability all contribute to agricultural commodity economics and add financial and capacity complexity across supply chains, requiring an increased understanding of the economics to gain control. Today, I’m wondering how many Midwest farmers will switch from planting corn to soybeans, since the USDA projects that soybean production in the US and South America will be tight over the next two years while global demand continues to rise. How much corn is planted, of course, will impact the economics of food supply chains, but it also will impact ethanol, alcohols, building products, plastics and even tires.

Sourcing professionals involved in commodities of any kind can make or break their company’s profitability. The skills required to manage the complexities of commodity sourcing are understanding economics, extensive research of the market, having the right tolerance for risk and volatility, maintaining a calm demeanor and building extremely strong supplier relationships at both the farm (producer) and broker levels. They also need an analytical approach combined with communication and quick decision-making skills to be effective in commodities. We can all learn much from understanding the economics of commodities.

Have you thought about the economics of low-priced Cheddar?

How serious is your talent development program?

training List

Three myths about training

Over the past two decades I’ve had the opportunity to work with some of the world’s greatest companies on talent management programs where dedicated chief executive officers, chief purchasing officers, L&D leaders and HR executives have focused on employee development and growth. The reality is that some companies are dedicated to the overall competency of the individuals in the team, while others are looking to check off training and provide a feel-good exercise with limited results. Those who simply “check the training box” believe they are helping their team because of 3 myths.

Myth 1: online learning works as a standalone solution for development
With the pace of business today, many people delay taking online learning modules until they reach a deadline or their subscription is running out. As a result, many students cram the material to meet deadlines, but the learning is neither used nor retained. Online learning is great as a prerequisite for instructor-led learning or coaching. It enables gaining a common vocabulary, presenting basics and bringing everybody up to a common platform prior to a project, web meeting or a training class. I once had a discussion with an HR director who had an objective to conduct recurrent training. He told me that by using disaggregated online training modules, he meets his objective, has no travel costs and will be considered a hero in his organization. The unfortunate fact is people will be wasting time taking the modules without any impact on the company’s or individual’s overall performance. Many organizations buy online learning subscriptions that are never used.

Online learning is an effective tool when combined with other learning and development activities.

Myth 2: a training workshop will improve competency

While a training workshop will expose individuals and teams to new concepts and ideas, the attendees rarely apply the new concepts and tools to their daily work. Many people come to the workshop, spend several days, make friends, have some fun and return to an environment where processes and hectic schedules do not facilitate the embedding and use of new tools. Most effective workshop programs I have seen have online learning prerequisite requirements, instructor-led course delivery and a project assigned at the end of the course. The project normally is completed in six months and must deliver tangible benefits to the by demonstrating the use of all the workshop tools. The instructor is available to act as a coach and the employee’s supervisor monitors the project through its completion. Once completed, the company provides credit for taking the course and enjoys direct benefits, the employee has embedded the learning and there is a high return on investment for the development program—I’ve personally witnessed a validated return of $40 for every $1 spent in a training and development program using this model. I am now using this model with a subscription-based category management program that is delivering even better results.

A training course combined with a program to embed the learning delivers tangible benefits for the company and individuals.

Myth 3: management can watch from the sidelines

Unfortunately, some management believes training of any kind is good for the team. They’re happy to see it launched, but feel that they already know the course content and see no reason to participate. Without involvement of management, the team fails to take it seriously. On one assignment, I had to stop the training program to develop a crash course for the leaders who realized their team was speaking a new language and using new effective tools that they didn’t understand. Leaders learn a lot by observing individuals and team dynamics during training. Leading by example through participation in the training always delivers higher performing teams with incredible results.

Management participation in learning programs shows commitment to building and retaining top class talent.

Witnessing these 3 myths, I’ve fundamentally changed my approach to learning. Action learning and small group coaching always leads to embedded skills and their application. Long gone are the days where training is just a few days away from the office and training manuals get dusty on the bookshelf.

A radical change to the development of teams and individuals is required. The old methods just don’t work anymore.

Are you still scheduling a training course just to meet an annual objective?

Donald Trump or Hillary Clinton: How much personal risk are you willing to take?

Ten tips for managing risk in uncertain times

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This is personal; especially in procurement and supply chain, our career and our lifestyle depend on how we manage risk. Procurement and supply chain executives are seeing volatility in 2016 with unstable markets, mergers and acquisitions, increased regulations and slow growth in the global economy. All bets are off for 2017, when a new administration will be in place whose policies are unclear at this time. There is little doubt that procurement and supply chain leaders will be forced to build strategies, plans and processes in uncertain times. To survive, we must welcome and embrace uncertainty.

No one can predict what the level of uncertainty will be, but with digital disruption, artificial intelligence, unstable markets and supply-chain integration, it is only natural that procurement and supply chain leaders build flexible strategies, be prepared to take risks and calculate the impact of risk-based decisions. Politicians are proposing many activities that could have a drastic effect on sourcing and supply chain operations. The thought of UK pulling out of the EU, the US pulling out of its trade deals, pressure on offshore headquarters, increasing wages and support for reshoring will all impact procurement and supply chain operations.

Taking the right risks and making early decisions will make or break a career. Here are 10 tips for managing personal risk:

  1. Continuous review of the strategy and the horizon will keep you and your team aligned to necessary changes
  2. When change is evident, build a clear business case and act decisively
  3. Be proactive and engage management early
  4. Quickly build a fact-based analysis and use influence to align top management to the strategy
  5. Assure that you have an effective change process
  6. Put your top people on executing the necessary changes
  7. Prepare for cynics and challenges to the plan
  8. Build communication and preparation for a crisis mode
  9. Lead with confidence and bring your team along
  10. Keep on top of the business news and use the analysts on your team to brief you daily of changes that are occurring

No one can predict the future, but the signs of significant change are in the wind. In preparing for battle General Dwight Eisenhower said “In preparing for the battle, I’ve always found that plans are useless, but planning is indispensable.”

What is your proactive strategy? How much risk will you accept?

Establishing the Right Business Culture for Procurement

Four tips to change and develop the right procurement culture

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It is the responsibility of the CPO to create the right culture for procurement. While there is a culture within the organization that reflects the overall values of the company, it is extremely important that a culture is built for the procurement team. A dedicated, hardworking, entrepreneurial, collaborative culture will support the CPO’s success in the business.

To be effective, procurement leadership must dedicate themselves to the culture and lead by example. Some cultures are focused on achieving cost reductions at the expense of anything that gets in the way. This is a challenging environment and costs the company in the long run. I always wanted my team to be very analytical with a total cost of ownership mentality, but I also expected that they would be open to ideas, suggestions and innovative ideas that would be of extreme value to the organization, while keeping the correct perspective on supplier relationships. When involved in a relationship for a category driven by competition and market share, they needed an arms-length relationship. In these markets where the balance, cost or opportunities could shift quickly, the sourcing manager must be flexible to shift with the marketplace. In more strategic situations with a sole source of supply for specification or technical reasons, where price is non-negotiable, it’s critical to build an organization-to-organization business relationship that will provide competitive advantage. The culture must also drive sourcing managers to build strong personal relationships, but at the end of the day, the business relationship always comes first.

In top class cultures, the procurement team should view every stakeholder as a customer who needs to be treated with an attitude of customer first. This requires the ability to sell the value of procurement and the ability to build fact-based presentations that influence, suppliers, management and stakeholders. It’s important to recognize that, in many cases, procurement does not own the expenditure, but it does own the procurement process.

On the outset, it seems difficult to instill these values in the culture. I’ve found these 4 actions are effective in cultivating a strong, value delivering environment.

  1. Engage, expect and prioritize the desired culture in your key managers and set the example at the top.
  2. Make the workplace great and when recruiting, keep the culture as a key attribute of your talent management profile.
  3. Where employees demonstrate the ability to meet the cultural norms reward them and the team on their adoption of the values.
  4. Develop a culture of respectful individuals, enabling them to respect ideas, challenges, internal customers and external suppliers.

Are you up for the challenge?

Building an effective team category sourcing strategy

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It often surprises me that many purchasing organizations lack an effective process for building a team-based strategic commodity sourcing plan. Typically plans built with key stakeholders are more successfully executed, deliver high results and encounter less resistance in the organization when change is required. By working with a team, you can assure the greatest sum of knowledge, get a better understanding of the project complexity, increase creativity and assure acceptance and ownership of the project by all members of the team. While many purchasing professionals have trouble engaging stakeholders, I have found when you can engage stakeholders, you will improve and increase the opportunities for your organization.

Who should be on the team? Before I start a program, I typically engage a steering group. The steering group’s role is to approve the project, make recommendations and remove any resistance or roadblocks that stand in the way the team. If the steering committee is comprised of senior leaders of the multiple disciplines required for the project, it has a better chance of success. If the sourcing leader can engage the steering committee as champions, the project is primed for success. All sourcing professionals should understand the stakeholder in terms of how much interest they have in the project and how much influence they have in the organization; a stakeholder with high interest and high influence would be a good one to engage as a steering committee member. This process will also work for the selection of team members. Other criteria to consider for team members are their ability, availability, knowledge, experience and overall willingness to contribute energy and time. The team’s responsibility will be to develop both short term (tactical) and longer-term (strategic) category strategies and sourcing plans. The team is also responsible for effective communications, information control and internal briefing of the project progress. If the team is committed to success, you will likely have a great project and outcome.

How should the team kick-off?  I suggest that the team build a charter. The charter identifies the mission, focus, objectives and scope of the project. It is an essential tool for keeping the team on track and focused. If things start going off the rails, the charter will bring the team back in focus. It is also necessary early in the sourcing strategy process to build a plan with timelines and milestones to measure the team’s productivity.

What are some important tasks?

  1. The first step in developing a strategic plan is to understand the historical situation and trends for the category. Ask the question “why has the organization sourced this category this way in the past?” If your organization can standardize the way “what we’ve done in the past” is reported, the more time the team has to explore future options and to focus on the strategy for the category.
  2. The team must evaluate the current situation, new opportunities and forecast the future trends to consider when sourcing this spend category. It is essential that the team take a deep dive into business needs and requirements, including things like receiving constraints at each facility, personalized service, inventory requirements, pallet markings and anything else that is currently being done by the incumbent supplier. Once the team has identified all of the business needs, it must look at the category and make the determination if the category should be managed tactically or strategically. Key tactical or strategic decision influencers are the number of suppliers in the industry with the capability and capacity to supply, the value-add contribution of the supplier and uniqueness of the specifications.
  3. Part of the planning process is to take a look at the sourcing history, price analysis and do a detailed analysis of the cost. Every buyer should have the capability to break out materials, labor, overhead and develop some idea of the supplier’s profit margin. Without this data, it is impossible to quantify the opportunity available in the project and determine the return on investment. This is a key checkpoint and milestone of the project: the ROI will determine if the project should go forward.
  4. After validating the ROI for the project, the team should evaluate the risk, global or local sourcing, technical opportunities, supply chain implications and supply market trends. The team now has the data to decide the way forward and determine the best strategy–should it be RFI/RFQ/RFP, auction, buyer’s offer, contract extension, logical negation with the incumbent, make or buy, or acquisition or joint venture? I have worked with teams that have developed and implemented all of these options.

The sky is the limit if a team can present a good strategy with a high ROI and build a convincing fact-based case. It requires discipline, process, strong leadership and the right people.

Do you have what it takes?

Suppliers financing customers: where is the line drawn on Corporate Social Responsibility?

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This week I read the New York Times news item “SYDNEY — Rio Tinto, one of the world’s  biggest miners has doubled its payment terms in a move that will force embattled suppliers to wait up to 90 days to be paid.” Can these suppliers survive? Update: On April 14 Rio Tinto announced it is dropping plans to extend supplier payment terms.

This is a great example of leveraging suppliers who, themselves, have invested in facilities, employees and inventories in the most remote corners of the globe just to support the customer. In an article The Unsuitability of Extended Payment Terms, Raz Godelink highlights that major food producers like Mondelez, Mars, Kellogg’s, Church & Dwight, Anheuser-Busch In Bev and Heinz extend payments to suppliers from 90 to 120 days. In many cases the suppliers to the food industry are agricultural industries surviving crop-year to crop-year. This industry requires capital to acquire the seed, fertilizer and equipment, which is all at risk in volatile commodity markets.

Stephanie Strom’s NYT article Big Companies Pay Later Squeezing Their Suppliers points out that companies like Mondelez are using the cash for a stock buyback initiative. Kellogg’s is financing a restructuring project and P&G has added significantly to its cash flow. The end result is a cash poor supply chain that cannot withstand interest rate hikes or another financial crisis. We have been fortunate the past few years that money has been virtually free, enabling this practice. In the long term, I believe it’s not sustainable and many of the smaller suppliers in many supply chains will be in trouble should conditions change.

I have to admit, reading those articles caused me to flash back to that July day during the last recession when I was on the phone with a Fortune 500 customer who hadn’t paid invoices dating as far back as November for work done according to the contract. I couldn’t tell my employees that they I couldn’t pay them because the customer hadn’t paid, so I maxed out the business line of credit and borrowed the max on my house to pay salaries and bills for the business. On that July day, the customer’s project manager was telling me that I would be paid the following week if I would discount the fees owed. I had little choice but grant a discount at the time—credit was extremely tight and we were owed a lot of money. By the way, the payment terms for this client were 90 days, plus I had 3 other clients who had moved to 90 day terms, so having a customer stretch payments as much as 180 days was a true crisis. I’ve never forgotten this $1 billion+ company using my small business as the bank.

Companies often cite Corporate Social Responsibility as a key part of a sustainability program. I believe cash-starving the suppliers who extend a company’s capability is irresponsible. It starves investment, innovation, growth and quality; how sustainable is that?

Are you requiring suppliers to act like a bank?

5 Things that Keep CPOs Concerned

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I was fortunate to be invited to speak at Ardent Partners CPO Rising 2016 conference at the Harvard Club in Boston, where an exclusive group of Chief Purchasing Officers gathered to share best practice, network with colleagues and understand the issues that will likely impact them as we see major shifts in our profession resulting from the digital disruption, changing workforce and continued globalization. Over the day and a half, I consistently heard these five key issues that keep CPOs up at night:

  1. The lack of skills needed to meet future needs
  2. The need to continually adjust processes to meet the constant changing business needs
  3. The need to align the supply chain with the organization’s strategy
  4. Risk management
  5. Managing mergers and acquisitions

I don’t see these issues being resolved easily and it is more evident than ever that the CPO must continue to adapt to change and develop the capability to reengineer business process as the environment changes with mergers, acquisitions, divestiture and business strategies impact the organization, process, systems and people.

CPO Rising 2016 was topped off with Andrew Bartolini inducting Tim Cook, Hal Good, and Gregg Brandyberry into the CPO Rising Hall of Fame. Congratulations to Andrew and his team on creating such an impactful event.

Can you help your CPO sleep better at night?