Category Archives: Uncategorized

Recession – 5 steps to take now

rough road

Are you prepared? What is your plan?

This week has been a week like no other as the stock market reacts to falling commodity prices, interest rate changes and devalued currencies. Bloomberg Business published an interesting article, “China may tip the World into Recession: Morgan Stanley”, that points out that a continued slowdown in the next years may bring global economic growth below 2%. Ruchir Sharma, head of emerging markets for Morgan Stanley Investments, views this as the threshold equivalent to a world recession.

While this is a bold prediction, it should serve as a warning to procurement and supply chain practitioners to dust off and review risk management plans. In any recession, where volumes are dropping, inventories are growing and cash management becomes critical, it is necessary to assure that the supplier network can withstand financial stress.

It’s also wise to do a complete contract review with both leverage and strategic supply sources. It will be smart to assure that the volumes are not overcommitted. In addition to reviewing contracts and volumes, building scenario forecasts can help a company to determine options and strategic directions. Now would be a good time to understand the impacts of currency changes on both the buy and sell side of the transactions. The savvy purchaser will align the supply chain with the impact of the customer’s terms and conditions on currency; in other words, understand the currency risk end-to-end and plan accordingly.

Review contracts with customers, too, to understand what commitments are being made to customers and take the opportunity to solidify some of the future orders in advance. Another practice I recommended, as we approach a potential recession, is business reviews with suppliers and customers.

Economists will argue for many years whether we’re approaching or are in recession. One of the worst things managers can do when the world is dipping into a recession is to take no action. Personally I like the Boy Scouts motto: “be prepared.”

  1. Review and update all risk management plans
  2. Review all customer and supplier contracts
  3. Build best and worse case scenario forecasts
  4. Understand all international contracts adjusting for currency fluctuations
  5. Audit the supply chain

What’s your strategy?

Lower Diesel Prices: 5 things to do now

diesel

How fast does your team react to available data?

In Supply Chain24/7’s news yesterday, the headline read diesel prices decline for the 12th straight week. “At an average of $2.615 per gallon, the price is down 0.2 cents compared to last week, with prices dropping a cumulative 29.9 cents going back to the week of May 25, when the average price was at $2.914.” What will you do with this data?

The challenge for the procurement and logistics teams is translating this data into cost reductions. There should be a parade of transportation companies eliminating surcharges and reducing cost, but I’m guessing suppliers aren’t coming to you. Your team should be acting on their plan for value enhancement now. One of the key characteristics of a good cost manager is to constantly monitor the suppliers and the supply markets. While there is no doubt that the fuel cost structure for for all freight companies is declining, they’re probably constructing arguments for other areas where costs have gone up. Customers should be prepared for this and be sure that their cost structure reflects the market changes.

Astute supply chain practitioners realize that, if unchallenged, the logistics suppliers will have the opportunity to significantly improve margins, while their costs are essentially remaining the same. The savvy purchaser will:

  1. Know the impact of fuel on the pricing structure
  2. Ask for the appropriate decrease
  3. Shake up the market with a competitive bid (if suppliers are unwilling to pass along the lower cost)
  4. Develop a longer term hedging strategy
  5. File away the lower fuel price impact data for use in the next negotiation.

What is your plan?

Is China Re-shoring?

yuan

Foreign Exchange Strategy or Economic Reality?

China devalued its currency last Tuesday, which will have big implications on the supply chains of many companies. It’s not too difficult to understand that when a currency like the Yuan is devalued, goods produced in China become less expensive for buyers in other countries, while imports become very expensive for Chinese buyers. It will encourage in-country consumption as Chinese consumers buy the less expensive domestic product over high cost imports. China’s economy has been struggling and its exports declined over 8% in July extending a declining trend. Those companies that have been moving to low cost country sourcing in places like South Africa, Viet Nam and Turkey may now find themselves at a completive disadvantage, while those companies remaining in China will benefit from the lower cost and increased exports.

The real supply chain losers are companies that export to China. This has impacted world commodity markets as commodity prices on oil and copper tumbled to a six month low. One devaluation will likely not be felt long term, however, a series of devaluations could effectively restructure the supply chains in the future. While we don’t know the true reason for the devaluation, the result in China could be a knee-jerk reaction to return to China manufacturing if the trend continues.

Astute supply management practitioners will always have a risk management strategy for currency. If you don’t, it is essential that you evaluate all global supply chains and develop scenarios and options. Don’t get caught by surprise, develop your Forex strategy now or you may need to reengineer the supply chain later.

Is China re-shoring? Maybe.

5 Key Considerations for Developing Procurement and Supply Chain Teams

Great-teams

Back to the Future: what does your team need in 2020?

I was speaking to an old friend about how the development of procurement teams has changed in the past 5 years. I found the conversation interesting and inspiring as he and I challenged the wisdom of traditional programs. No longer can companies be satisfied with traditional programs focusing on tactical and strategic functional skills. In recent years much has been accomplished in both the Procurement and Supply Chain profession; costs have been reduced, inventories optimized, logistics closely managed and there’s a renewed focus on supply chain alignment and integration. Lifecycles are shorter causing velocity and flexibility to be key drivers of supply chain and procurement success. So what type of skills development do our teams need now?

As we look to the next five years, we will need to design development programs that are enable companies to extract value, get innovation, improve speed to market and gain supplier to customer alignment across the entire supply chain. This will involve business integration, transparency and relationships that go far beyond what we have today. Once these new skills are embedded, synergy and interdependence will drive the supplier/customer interactions as we quickly respond to customer and market demands.

Since competency assessment models are being developed for the skill sets needed for today’s supply chain professionals, they will be inadequate as the supply chain continues to evolve unless future skills are included. Standard training programs where everyone goes through fixed, common training modules and development programs designed for functional competence will not accomplish what organizations need. It is essential that learning and development professionals and providers realign programs to move from a functional orientation to a business and relational skill-based approach.

It is true that procurement and supply chain teams still need technical and commercial skills. In fact, a few hours ago a Bloomberg news story got my attention that commodities are crashing like it’s 2008 again. To be competitive in the next five years, especially when faced with situations like commodity fluctuations wreaking havoc on your financial supply chain, these core skills must also be developed:

1) Influence

Organizations have changed from the command and control management model to a matrix organization structure. The interaction between business units, conflicting priorities, business drivers, budget holders and stakeholders has driven the need to develop our teams in influencing skills. The new opportunity to tailor processes, develop high-performing business teams and deliver increased levels of value depend on our ability to influence others.

2) Leadership Skills

The supply chain and procurement teams have a big role in the value contribution to their respective businesses. It is essential that we identify the right people in our organizations through succession planning, then provide leadership rotational programs, development programs and interesting projects to prepare them for their eventual role as company leaders. Companies need multi-generational leadership, combining experience and new digital thinking, for optimal results.

3) Relationship skills

It’s often difficult to understand that relationship skills are not innate. To ensure competitiveness, value extraction, alignment and trust across the supply chain, it would be wise to develop our teams in strategic relationship skills. The ability to be analytical, trustworthy, create options and operate with a principled approach is a learned skill. People operating in a tactical mode will no longer fit as the profession evolves. Since face to face communication is becoming antiquated in a fast paced environment where e-mail and text messaging becomes more the norm, written and verbal skills are more important than any other time in the history of the profession. Both internal and external company relationships will determine whether company goals are met or not.

4) Onboarding

While we are bringing in talent when we find it, it is essential to continually assimilate new employees with the company mission, vision, processes and culture. These development programs require orientation and integration of new employees so they can quickly integrate and use their talent, thus making contributions as soon as possible.

5) Learning

Developing supply chain and procurement professionals for the future is not business as usual. Much attention must be given to the soft skills of business when there are dramatic shifts in supply chain. Learning will continue to be an ongoing process as we advance with our technology, industry consolidation and innovation.

I am glad that my old friend asked me to provide one nugget of my learning and development philosophy. It made me think hard about moving to the future now. I am invigorated to provide the tools of the future now!

What skills are you developing?

10 Megatrends for Supply Chain Management—where will you be in 2020?

srm chain

Developing Strategies for Success

2015 is becoming the year of the merger, which means industry consolidation, megamergers and industry consolidation across most supply chains. This trend is driving many companies to develop exclusive, integrated, competing supply chains. Companies that have advanced this practice are Apple, Samsung and Toyota with end to end integration serving the final customer. The key drivers of this type of supply chain are cost transparency, value creation, integrated business systems and innovation. Is your company on top of the trends that shape your supply chains?

To gain control of supply chains, you need to have a good understanding of the trends that will shape supply chains in the coming years. The 10 megatrends I’m seeing are:

  1. Supplier relationship management is becoming a core competency
  2. Value creation is more desired than price management in the future
  3. Innovation transfer is required for the success of the entire supply chain
  4. There is a movement toward portable manufacturing
  5. Contingent work forces are becoming more prevalent in business
  6. Internal and external collaboration is a business requirement
  7. Business strategy alignment will be required between all links in the supply chain
  8. Distribution, logistics and asset management will be a bigger priority
  9. Life cycles are becoming shorter
  10. Supply chain and manufacturing agility will be required to dominate competition

The supply chain management function has been evolving to keep pace with the changing trends. I’ve seen many companies struggle to keep up—those who make the investment to develop skills and improve processes succeed. The diagram below shows some of the key trends that have impacted and evolved supply chain management.

Evolution of SCM

As I see it, it is essential to move from a customer/supplier relationship to an integrated supply chain focus. While some companies have made the leap and lead their industries, others are still back in the price management focus.

Can you make the leap?

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

You’ve tied the knot; is it effective?

Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”

Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.

Characteristics of Ineffective Sole Source Supplier Management

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success

While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.

To become effective with strategic supplier relationship management:

  • Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
    • Speed to market
    • Exclusivity
    • Innovation
    • Speed of response
    • Joint customer and supply chain integration
    • Principles around cost transparency, margins, and investments
  • Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
  • Create joint value targets and incentives for both sides.
  • Develop closer business integration.

With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.

The Future is Now

6 Steps to Acquiring and Delivering Value

value

The market destroys companies that fail to deliver value!

Business success is the result of superior performance of a product with extraordinary levels of service and compelling emotional value sold at the most leveraged price. Without fully understanding the supply chain, value proposition and markets, this cannot occur. Executives in most industries are adapting to shorter product life cycles, rapid commoditization of once differentiated products and weakening of prices by customers with leverage. The strategies and operational initiatives that delivered value last year are losing their impact today.

What does it take to acquire and deliver value? In my experience, the conditions for success are:

  • The business and supply chain are aligned to deliver superior customer value.
  • Knowledge and capability exists internally (in the company) and externally (in the supply chain).
  • The focus is on products where only a small fraction of the value is being deployed (thus making it a prime target for renewal development and leverage).
  • Value must meet customer needs, stakeholder needs and shareholder needs.
  • Value must be defined, which requires a detailed understanding of the relationship between price and functionality of products and services.
  • The total organization and supply chain must buy in to the value strategy.

The combination of functionality of product or service offered to the customer (the value of utility), the price they will pay and the emotional impact (the value of esteem) results in true value. It is inevitable that companies will need to integrate and align the supply chain to meet business objectives and achieve success.

What are the six steps to achieve these conditions for success in value optimization?

  1. Assemble expert teams to define future markets for their products and services and develop plans to dominate them.
  2. Define strategies based on differentiation, innovation and cost leadership.
  3. Assess the strategic capabilities that need to be resourced, developed, protected and leveraged ahead of competition.
  4. Exploit the market value of intellectual capital.
  5. Invest in developing internal teams and strategic supply chain partners.
  6. Define and extract value.

When looking to suppliers to acquire and enhance your product’s value, it’s important to understand that acquiring and delivering supplier value does not rest solely on the procurement or supply chain teams; it is a business-wide process. Without a forward business strategy, investment, alignment and business-wide participation, value will not be optimized for your company, your suppliers or your customers.

How will you ready your company for the challenge ahead?