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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.

What’s the organizational life span of the Chief Procurement Officer?

Business man protecting new business growth concept

When I started working, the head of purchasing had a job until he retired and then next person-in-waiting usually took the helm. Today it seems that our Chief Procurement Officers have about the same longevity as a coach in the NFL or MLB. In the past year or so at least seven of my friends and colleagues holding the position of Chief Procurement Officer experienced unplanned exits from their organizations. Many of these CPOs had a very big public profiles, they all made a large contributions to the organizations they served, all were actively engaged on the Management Executive Committee in their firms and in some cases were driving key projects with Board of Directors visibility. I’ve discussed the short lifespan with industry experts and other consultants who have seen the same trend for the CPO. It’s been researched and reported by CAPS Research whose study of CPOs in 2014 reported that the more than half of the CPOs in Fortune 500 companies had been there for less than 4 years and that only 10.6% were promoted to the position from within. The study also found that very few CPOs were promoted to higher executive positions. What can be done to prolong the lifecycle of the Chief Procurement Officer?

The Chief Procurement Officer may be more vulnerable than the Chief Executive Officer with an average life cycle of about 5 years. There are ever increasing expectations that CPOs will deliver continuous deliver cost and value improvement, align with multiple business units and objectives, service the business in a matrix organization structure, manage myriad stakeholder demands, work globally across borders, accelerate speed to market, integrate the supply chain and manage merger and divestiture activity.

The longer the CPO is in place on the job, the more difficult it is to rejuvenate and create new strategies to continue the generation of continuous cost reduction, which is still the primary measurement in many businesses. As new initiatives become increasingly important, the organization expects the CPO to be proactively ahead of the curve on programs like risk management, sustainability, re-shoring, big data strategies, best country sourcing and leaning out the supply chain.
How can CPOs increase their lifespan? Here are 3 key strategies for survival:

1. Talent Management

To be effective in the organization, the CPO requires a top team to execute the global strategies, align and support the business, architect the supply chain, and drive the metrics that will change management focus from cost to value delivery. Talent is scarce and there is a lot of competition between CPOs to recruit, develop, and build a team capable of executing a world class results based global strategy. The inability to develop a world-class team as a prime objective is one factor in shortened longevity on the job.

2. Total Cost Focus

It is critical that the CPO educate management on the Total Cost of Ownership and value extraction from the supply chain. A CPO with a sole focus on continued price reduction is destined to fail. While everyone likes reductions, we know that suppliers are not a source of incremental margin for the buying company. All suppliers need a healthy margin to reinvest, innovate and drive industry changes. With the ability to conduct cost analysis, there is little doubt about the transparency of cost. If a CPO with a strong emphasis on price reduction will soon run out of runway and require new suppliers and additional sources to drive margins down forcing industry consolidation.

The real opportunity is value enhancement and true cost reduction through specification change, redesign, capital investment with faster cycle times and least cost sourcing. In addition reduced warranty, risk mitigation, speed to market, target costing and innovation will play a role of increasing importance in future CPOs. Ignoring these will be a sure way of sealing the fate of the CPO.

3. Get a Seat at the Table

In the future, the CPO will play an increasing role in business success. It is essential that they play a key role in the executive management of the company, report to the CEO and have some accountability to the Board.

Currently, purchasing expenditure accounts for about 50% of a business’ cost. I see this increasing with global sourcing, outsourcing, industry consolidation, and value maximization. The ability to integrate suppliers in the supply chain, drive for least cost production, and increased levels of value and supplier relationship management will ultimately drive the lifespan of the Chief Procurement Officer.

Time to take inventory and assess your phase in the company lifespan.

Change or be changed.

Supplier Innovation: Fact or Fiction?

 

chair photo

This week, I am inspired by an article in the McKinsey Quarterly, Google at Work’s Atmosphere webinar and a chart tweeted by HBR. All focus on innovation and I highly recommend that you read and view them (after you read my blog, of course). Innovation is exciting and we’ve all heard and read about innovation from suppliers, but here’s a sad fact: While almost any CPO will commit to capture supplier innovation, very few have the process and capability to do so. So what are the essential elements that drive supplier innovation?

Many of the companies I have studied still place procurement’s priority as driving prices down, extending terms and managing a series of tactical relationships. None of these practices are a recipe for creating more strategic relationships that provide innovation, investment, mutual benefit and interdependency to excel in the supply chain. Effective supplier relationships are founded on a sound strategy, planning, commitment, trust, joint effort, investment and significant rewards for everyone involved in driving innovation. You’re probably thinking, “Sure, Bill, I’ll start doing that today.”

Innovation is a company-wide, complex endeavor requiring cross-cutting practices and processes to structure, organize and encourage it. The same could be said for supplier innovation; it’s hard and few supply organizations have developed the capability to capture innovation. There’s no magic formula and definitely no prescriptive flowchart that works for every company. There are great examples of success that we can learn from. One great, successful process to capture innovation is Roche/Genentech’s Supplier Relationship Center where suppliers and researchers reside to develop breakthrough projects leading to new products, processes, cost and value enhancement from which both parties benefit.

While it’s difficult for many companies to develop innovation centers, it is feasible to develop a supplier innovation fair. I had to do this in my career when my company built a product without supplier input. When the product failed, we realized that there was an opportunity to learn and get help from suppliers. The product had hundreds of components, so we created a display of all sub-assembles and parts for the entire product and invited suppliers to review the product. For any supplier identifying innovative ways to redesign, cost reduce or improve the product, we agreed to give them business for several years. The result was about 250 ideas of which 62 were implemented, driving a better product, more efficient manufacturing, lower cost, improved warranty issues and new suppliers. A supplier innovation fair is a simple process that requires top management commitment, technical expertise, manufacturing knowhow and open mindsets. There must be a dedicated cross-functional team to review the ideas. One key to success is quickly reviewing the ideas with feedback to the suppliers, who need to dedicate expense, resources and effort for your company’s process. Companies fail at innovation if they never acknowledge the supplier’s effort, ideas and provide quick feedback. Suppliers will make investments if they are rewarded and treated with respect.

Supplier innovation is real if you get a management mandate, create a process, involve a cross-functional team to commit to the process, provide suppliers with incentives to support the program AND learn how to ask questions. Like Tim Brown, co CEO of IDEO said in the Google at Work webinar, start with a question, not an idea. Ask the question, then explore the idea. Frame the question in the right way; to steal Tim’s example, don’t ask “how can we change this chair”, ask “how can we sit differently to make our conversation better.”

Supplier innovation is possible. To achieve it:

“the funny thing is we actually banned the word “supplier” from being used at the center. We are partners, working together, trying to bring success to both our organizations.”Clive Heal, Roche GPP Innovation Center of Excellence Team Leader

Millenials Rule the Workforce

 

Millenials Take over the Workforce

While watching the news this morning, I saw a story based on Pew Research that the Millennials now make up the largest part of the US workforce. The children of Baby Boomers and Gen Xers, the millennial generation were born 1981-1997 with approximately 1/3 of US workers (53.5 million workers) belonging to that generation.

The shift to a new generation provides both opportunities and challenges. As employers, we need to recognize this generation has a very different outlook on work life balance. They tend to prioritize things differently than previous generations. In fact, the CNN report this morning mentioned Millennials preferred midsize companies to larger companies and will opt for lower salaries in an organization that’s fun to work in over a rigid firm with a defined structure. This is the first generation to have a true freelance, independent attitude rejecting the traditional 9-to-5-employment structure. As a group, Millennials tend to reject career path planning and enjoy the flexibility to move from company to company. Another article I read predicts that Millennials will experience over 25 jobs in a lifetime.

The implication for those of us who are locked into the corporate mindset is that we will have to change the way we and our companies operate to attract the best talent. It’s time to start making adjustments to our employment plans, companies and work environments if we are to attract, retain and grow supply chain and operations talent. The stronger implication is that rigid corporate structures will have the modified to accommodate the group that now makes up the largest portion of the work force. Especially if we want to attract Millenials to manufacturing, especially in purchasing and supply chain.

Change is always hard, but necessary, if our companies are to survive.

Welcome, Millennials, time for us to pass the torch.

Congratulations on your 100th, ISM

ism-conf-2015

Milestone for Supply Management

Today I’m dedicating my blog to the Institute for Supply Management, a group that I have been a member of for over 40 years. Next week at the ISM2015 Conference, the organization will celebrate its 100 year anniversary of serving purchasing and supply management practitioners and their organizations.

The backbone of the organization is the large volunteer group that supports the organization. These volunteers have recruited, educated, and supported the organization with countless hours throughout their careers with many continuing into their retirement. These active volunteers come from all career levels from student through CPO. When I first joined as an entry-level buyer, it was the volunteers of the Central NY PMA who helped me find the right educational events and are the reason I continued my membership as my career took me from central NY to Watertown NY, then to Cleveland and to Detroit and to the opportunity to be an ISM employee for 3 years. The networking and volunteer experience helped me develop leadership and presentation skills that enhance the skills learned through my work experience. I am extremely grateful and owe these volunteers a lot.

As an organization, ISM has provided educational programs, certification programs, conferences, seminars, research and practices that drive the organization and the profession forward. In the last 10 years especially, the profession has experienced rapid growth, technology change, process change and integration into larger supply chains. The Institute for Supply Management has always been at the forefront of these changes, providing global reach with local touch through the volunteers and affiliates to the profession moving forward.

As I look to future, the role of the ISM will no doubt change with technology, business practice and talent changes in a rapidly changing environment. The organization faces stiffer competition than ever with many new entrants into the education and certification association space and the membership growing globally as supply chains become more integrated.

I’m looking forward to seeing ISM strategically move to serve the future needs of its members and their companies. Congratulations, ISM on 100 years and

I’ll see you at ISM2015 in Phoenix next week!

Earth Day: Does your company make the grade?

 

New-Life

On this Earth Day, it is appropriate to dedicate this blog to sustainability. There is no doubt now that sustainability will be a performance indicator for future investors in companies and it’s interesting to read corporate reports dedicated to green , sustainable priorities. While many corporations give lip service to sustainability, unfortunately, when it comes to funding such efforts many companies fall short. Fortunately, more companies are making the investment, like these that warrant mention:

  • Alcoa’s executive compensation is tied to safety and environmental leadership, which includes greenhouse gas emissions.
  • GE uses it in resources department to integrate sustainability into the company’s culture.
  • Coca-Cola has committed to reduce water use by 25% and hired an external audit firm to monitor these results.
  • At its shareholder meeting, Starbucks CEO Howard Schultz discussed the company’s efforts to work with suppliers and local communities investing in sustainable farming and ethical sourcing.
  • Dell integrates recycle materials in its product and packaging and considers end-of-life recycling.

All are examples of leadership in sustainability that starts in the board room and becomes part of a company’s DNA.

Since sustainability is becoming important to investors, many firms are measuring corporate sustainability and ranking them according to their criteria. One notable firm is the Toronto-based Corporate Knights, who publish a list of the top 100 most sustainable companies.

For sustainability to be effective, there must be a deliberate strategy, commissioned by the Board of Directors, mandated by the CEO and driven to be part of the culture.

Is sustainability part of your company’s DNA?