Tag Archives: procurement

Building an effective team category sourcing strategy

rowingteam

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?

money wrestling

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?

10 Tips on How to Prepare for the Worst on Business Travel

train-traveling-travelling

This week, like too many weeks recently, we think about safety, especially in our travels abroad. In my career, I’ve logged millions of miles travelling the globe for business and personal trips and, like most seasoned travelers, have been caught in the chaos of physical and political disruption. My wife, Linda, travelled so much in the 1980s and 1990s that she was considered the women business traveler maven and frequently sought after for advice on everything from how to pack to dealing with toilets of the world. She, too, has had direct experience with the unexpected and unpleasant events of travel. Here are some pointers from our experience.

  1. All hotel room doors open to the inside. My wife was opening the door to her room in a 5-star hotel when suddenly a man pushed her into the room. He was then standing between her and the door—the only escape route. Even a small person can push you into a room. Be aware of your surroundings.
  2. Carry energy bars or other packaged food in your backpack or case, keep the gas tank full on your rental car and have some cash. In Narita when the 2011 Tōhoku earthquake and tsunami hit, in Toronto during the 2003 blackout, in blizzards, tornados and a cyclone, I found these things can be difficult, if not impossible to get. Carrying a filled water bottle doesn’t hurt either (get a refill on the airside of security).
  3. Carry a small flashlight or LED headlamp. I pack a couple. You have no idea how dark it gets in a total power blackout.
  4. Enroll in STEP (Smart Traveler Enrollment Program), the US Dept of State program that can update you with important safety and security announcements and make it easier for the embassy or consulate to contact you in the event of an emergency.
  5. Review the US Dept of State traveler’s checklist.
  6. Review what the US Dept of State can and can’t do during a crisis webpage.
  7. Sign up for the appropriate Twitter Alerts. Click on the participating organizations link for suggestions.
  8. Learn a few key phrases in local language of the country you’re travelling to.
  9. For your business, review the Ready.gov Crisis Communication Plan and be sure you have the appropriate information handy if you need it.
  10. If you’re in a disaster/crisis area (and are not in danger), send a text. In the 9-11 events and in the 2011 earthquake, I couldn’t get a call to go through. I was able get a text through.

These are just a few suggestions to add to your emergency plan routine. Years ago I grumbled when I had to evacuate a hotel in the middle of the night for a fire alarm, when my back pocket was slashed in a robbery attempt, I had to wear a cheap watch to not attract a thief and I had to be sure the kidnap and ransom and international health insurance was current. Today, I wish that was all anyone had to worry about on a business trip.

Be careful out there.

Why Sitting at Your Desk is Harmful to Your Business

desk

This month is National Slavery and Human Trafficking Prevention Month. The President’s Interagency Task Force to Monitor and Combat Trafficking (PITF) is a cabinet-level entity created by the Trafficking Victims Protection Act of 2000, its mission is to coordinate the the efforts to combat human trafficking. In the PITF Fact Sheet released earlier this month, Procurement and Supply Chain is named as one of the 4 priorities. The PITF meets annually and is proposing some new measures sure to put pressure on organizations like the fishing industry and retailers who unknowingly purchased product where trafficking was involved.

I mention this in my blog because I have long held the belief that it is impossible to responsibly source internationally from one’s desk in the US. Unfortunately, that’s the practice that a large number of companies engage in. They locate sources of supplies through trading companies, brokers or stumble across them on the internet. In many cases employers enjoy the cost benefits from global sourcing, but fail to see the value in the required due diligence of investigating the entire supply chain and creating relationships with suppliers. They are concerned about the budget and expense of travel and fail to see the damage that the company can be exposed to if the product has a reputation risk or bribery issue.

It may seem like a prudent move, but it can land a company in a PR, regulatory and customer nightmare. My experiences with international sourcing are that I have found that the trading companies and brokers are often not concerned with product consistency, CSR, dedicated manufacturing sites and sanitation. The customer orders are coming in and the customer is content to stay in the US and fork out money, so, why worry about anything but price and delivery.

Some things I’ve seen are food companies processing materials in rusty metal cans, unsanitary plants, machinery incapable of holding tolerances, safety violations capable of great harm, death and life-long disabilities and the list goes on. I have also seen the most modern robotics and invested capital to assure consistent, safe and least-cost manufacturing in many foreign companies. The trick is to survey and understand the supply chain, visit the supplier and make sure your company is not exposed to reputation damage from the global supply chain. Understanding the culture and building strong relationships with foreign entities is even more important when sourcing globally.

Here are 5 key tips that I recommend:

  1. Never source from your desk; visit the supplier
  2. Include the cost of visiting suppliers in your cost reduction analysis
  3. Always visit the suppliers and consider contracting resources in the region to be your eyes and ears
  4. Look for all health and safety issues, create extensive interviews with principals
  5. Develop strong CSR and Sustainability policies that the suppliers must sign and agree to

The PITF is creating resources to help, including the release of the online Responsible Sourcing Tool this month. Use these resources and read up on USAID’s new Supply Unchained initiative. Look into the tools offered by ISM like the Supplier Risk Tool and CIPS’ Sustainability Index. And most importantly,

Get up from your desk and visit suppliers.

The Secret to Capturing a Market—How will you get there?

capture a market

With the PowerBall frenzy of a $1.5+ billion prize, many of us are thinking of what we would do with the winnings. While winning this big prize will certainly give one leverage with the swarms of financial advisors and others seeking investment, even those of us who enjoy planning our investments and playing the market will need to rely on suppliers to manage and meet our goals if we win the big prize. If you want to break into a market or develop that next “can’t live without it” product or make life better for a community, you need to rely on suppliers. The kind of customer you are determines your outcome. For businesses, regardless of size, the value you need to capture a market doesn’t just come from inside the organization.

Many of us have been exposed to a management philosophy that suppliers are a source of incremental profit. Nothing can be further from the truth; a continuous focus on reducing price gives a false sense of security as companies meet short term cost reduction goals. Many buyers are happy that their suppliers are reducing margins, but lose sight of the fact that suppliers need sustainable margins to reinvest in the business, innovate, automate and drive to be the low cost producers. The astute business person knows that the larger opportunity for their company is in the value from the suppliers.

Value can come in many forms and the opportunities that arise truly provide sourcing professionals, and the organizations they represent, competitive advantage. A few examples are:

  • Achieving Speed to Market
  • Supplier investment
  • Product improvement
  • Process improvement
  • Complexity reduction
  • Systems integration
  • Shared risk
  • Shared resources
  • Market intelligence
  • Lowest cost manufacturing
  • Financing Capital
  • Innovation
  • Market exclusivity
  • Joint design

The skillset required to capture the value opportunity goes far beyond the tactical skills required when applying competitive leverage and price pressure. It requires strategic thinking, planning and execution skills. It also requires team members who are trustworthy, reliable and analytical with strong influencing skills.

Whether your organization is first in a market or captures a market with innovation and exclusive rights to technology, these benefits far outweigh the few dollars captured in the short term with price reduction. Steve Jobs understood the value proposition when Apple launched the first smart phone; do you think suppliers viewed Apple as a good customer?

Price or value? How you reach new heights is your choice!

What is the Right Supplier Relationship?

AngerConflict

I’m asked often to identify the correct relationship that companies should have with suppliers. Many clients are surprised at the answer, which is the minimum relationship that will enable you to meet your business objectives. If you’ve read my blogs or heard me speak, you may now be asking “is this the same Bill Michels who says companies need suppliers for innovation and that the best customers get the best ideas?”

There’s a wide range of relationships. I classify suppliers as competitive market, proven suppliers, performance driven suppliers and strategic alliance partners. As a supplier moves up the relationship curve, the intensity of resources required to manage the relationship significantly increases. Logically, it’s impossible to drive all of your supplier relationships into the strategic alliance classification. Strategic alliances normally involve shared capital, objectives, resources, business information and equity. The partners are interdependent and have significant synergy which enables them to achieve competitive market advantage by the strategic linkage. The strategic alliance is a rare relationship for many companies and one that is not easy to achieve. Although many companies believe they operate with strategic alliances and refer to their suppliers as partners, they actually have competitive market and proven relationships.

The second part of the supplier relationship question posed to me is “how can I operate with both a business and personal relationship?” The business commercial relationship must always be the dominant relationship. The personal relationship is helpful in achieving preferential treatment as the customer of choice.

SRM

The key to developing the right supplier relationship is to move beyond a price focus to a value focus. Value can be defined as:

  • Speed to market
  • Innovation
  • Investment
  • Product improvement
  • Process improvement
  • Complexity reduction
  • Systems integration
  • Shared risk
  • Shared rewards
  • Aligned business objectives
  • Shared resources
  • Market intelligence
  • Finance
  • Performance
  • Waste reduction
  • Redesigned products and specifications
  • Lowest cost producer

While it is unfortunate that some companies and industries remain focused on tactical strategies which are short term price-based. To survive in the future, supplier relationships must be mapped, managed and optimized for value delivery.

What is the minimum relationship that will enable you to meet your business objectives?
Sometimes it’s a true strategic alliance, but sometimes it should be arm’s length.

Why I Worry About Interest Rates (And Maybe You Should, Too)

broken chain

The latest U.S. employment report seems to have given the Federal Reserve a strong signal to bump interest rates after it failed to do so in September. Employment increased by 211,000 people following a gain of 298,000 in October that was bigger than previously estimated, easing concerns that manufacturing activity is slowing.

While the interest rate increase is expected to be modest, it will have an impact on procurement activity and supply chain finance. Before looking at the impact of raised interest rates, let’s look at the impact of reduced loan availability a few years ago and extended payment terms–stretched from 90 to 180 days in some industries. These extended terms have fueled a booming factoring market where suppliers sell their receivables at discounts that are far higher than loan interest rates to maintain cash flow. Not only is the sustainability of this practice in question, but it becomes difficult for a company to compute true days sales outstanding. So, can the supplier who factors or the buyer who relies on liquidity calculations as part of risk management really know where the company stands? Higher interest rates will not help a company stop this sell-receivables-today-to-fund-new-sales-production cycle.

We have become comfortable with low cost money and when that cost is increased, it will have a serious impact on low margin, high volume suppliers who are essentially financing the supply chain for the end customers. Labor costs will likely be impacted as the cost of credit cards, hard goods, homes and automobiles carry the increased interest rate cost to the consumer and workers will look for higher wages.

While the interest rate hike will not be a surprise, the market change from a buyer’s market to a seller’s market may catch some procurement and supply chain professionals by surprise, who in many have not lived through periods of inflation and increasing prices.

While I hope that the impact is minimal, I am advising all of my clients to complete a financial risk assessment of their supply chain, dust off cost containment processes, retrain their teams and review all contracts.

In times of uncertainty, its always best to drive a proactive approach.

Aluminum smelting in the USA: does anyone really care?

aluminumsmelter_0

Is the U.S. about to lose yet another vital industry?

Alcoa, the largest U.S. aluminum producer, announced it will cut smelting capacity by over 500,000 tons and Century Aluminum has also announced cuts at its Sebree smelter. The aluminum industry is experiencing a significant price decline to the lowest level since 2009–an impact on Alcoa’s earnings, which have dropped 30% this year. As I’m writing this, Alcoa’s stock price is tumbling.

China accounts for half of the world’s aluminum output and is on pace to export record amounts of metal products this year, helping to deepen a worldwide glut of aluminum according to Bloomberg business. The increasing inventories of aluminum, combined with the lowest price since 2009, has driven many producers to idle capacity and consider exiting the industry. According to David Wilson, an analyst at Citigroup Inc. in London, “the aluminum price is going to be pretty horrible for a while, until we see some western world production cuts.” China’s slowdown in economic activity, combined with its desire to export by eliminating export duties on aluminum, will only make the problem worse.

No doubt companies like Alcoa are considering new strategies to curtail primary metal production and invest in specialty metal components, like developing a line of powdered metals made specifically for 3D-printing applications. Having worked extensively in the aluminum industry, I know the complexity, cost and processes in this industry and the difficulty U.S. buyers have in justifying “buying U.S.” when China export prices are so much lower. On the other hand, mining bauxite, smelting and rolling aluminum has a big impact on our economy; the U.S. aluminum industry generates more than $65 billion a year in direct economic impact. When all suppliers and related business functions are taken into account, the industry drives $152 billion in economic impact—nearly 1% of GDP according to the Aluminum Association. Long term, if capacity is significantly reduced, industries like aerospace, automotive, machine tools and appliances will all suffer from availability and pricing.

Once aluminum capacity is mothballed or idled, it will be difficult to bring these facilities back to operating condition. While we are enjoying record low prices now, we will likely pay the price in the long run.

Is the aluminum industry him following the same path as the U.S. steel industry?

5 Key Considerations to Outsource IT

outsourceIT

Does your organization insource or outsource all or some IT services? In my assessment of about 200 organizations’ procurement and supply chain capabilities some obvious opportunities have been discovered like SKU rationalization, supplier rationalization, specification homogenization and outsourcing. MRO, internal print shops and IT can be excellent candidates for outsourcing, since these areas are not core competencies for many companies and there are opportunities to improve cost, productivity and efficiencies. For this blog, I want to focus on the IT outsource.

Many mid-market companies cope with decaying technology, old versions of key business systems, limited resources and tech staff turned firefighters who try to keep systems running. When implemented well, outsourcing IT will result in cost improvements, new technical capability, increased capacity and improved staff productivity. When the IT issues consume the company’s priorities and take a large amount of management time and resource or when IT issues cause the company to lose customers and impact employee productivity, it may be time to consider outsourcing.

Outsourcing is not a panacea! Many companies who have struggled with outsourced IT services implementation will confirm that, but when done well with an IT managed service provider (MSP) who’s right for your organization and can develop into a trusted advisor, there can be tremendous payback for your organization. Here are 5 key considerations for successful outsourced IT services:

  1. Once IT is outsourced, the supplier has a strategic link to your business. It is essential that the contract aligns the outsourced supplier’s strategy to your overall business strategy.
  2. Demand that the supplier’s team is not only competent, but a good fit with your company culture. Insist that the team stay with your business beyond the implementation so that the supplier won’t be tempted to divert those resources to other clients.
  3. Define supplier performance and develop KPIs that maintain and drive performance.
  4. Build a disaster recovery plan for risk management.
  5. Run the outsourced supplier as if they are an extension of your firm.

If companies have not made the appropriate investment in IT, outsourcing can be a good solution and provide budget control not possible when IT suppliers are considered only in break/fix scenarios. It enables the company to upgrade technology, reduce cost, increase uptime and provides high quality resources to the IT area. You technical staff can focus on strategy to drive your company forward. If your company does not depend on IT for competitive advantage and you can manage the pitfalls, it can be a good candidate for mid-market companies.

Is it time to review non-core competencies and outsource?