Tag Archives: procurement

What gets measured, gets managed

 

Gas full meter

Value

How do you measure supplier performance?

I’m often asked to talk about key performance metrics for supplier relationship management. Many key executives want supplier metrics to focus on value contribution like flexibility, continuous improvement, speed to market, innovation and organizational alignment, but most supplier metrics are still focused on price, delivery and quality, since they’re easy to measure. However, once margins are reduced to levels that sustain the supplier, quality reaches the capability of the supplier and deliveries are consistent, there’s not much improvement to single-dimension metrics without significant investment.

SingleSlider-supplier-dashboard-large

When we think about metrics, they need to be culturally acceptable to both organizations, timely, compatible with other metrics, simple and responsibility-linked. They should also be cost-effective, balanced, customer-focused and meaningful. After all, the objective is to indicate the degree of progress being made and confirm whether actions being taken are effective.

When I speak to groups about key performance metrics, I like to define what they are and what they are not. Key performance indicators (KPI’s) are always quantifiable, measurable and actionable. They measure factors critical to the success of the joint organizations and are tied to business goal alignment and screech targets. No more than 5 to 8 key metrics should be considered when looking both procurement and supplier performance and they must be consistent throughout the companies. Unfortunately, many metrics are vague and unclear, nice-to-know information, but not actionable, are refutable and are exhaustive sets of metrics. Many procurement teams create KPIs without organizational alignment or stakeholder engagement, because they feel they’re in a powerful position to drive supplier compliance. In reality, these metrics and relationships eventually fail.

When developing key metrics, they should be mutual for buyer and supplier, have a cause and effect relationship, targets should be set by priority and integrate with strategic long-term agreements. Measurements in world-class companies are linked to value optimization: is the company achieving a value shift with the supplier and is new value being created?

It is likely that metrics will fail if they are not a collaboration between your stakeholders and the supplier. They will also fail if they are a wish-list of criteria that is difficult to achieve. If your business is not a learning culture, desiring to continuously improve, metrics will just be numbers.

Do your supplier metrics improve the product, supply chain and company?

Supply Chain Automation – The Future is Now

tesla charger

The Back to the Future Day, October 21, 2015, is finally here! The one prediction that everybody’s talking about is the Cubs in the World Series; hopefully the bats will get going for that prediction to be true. Yesterday, as my wife and I pulled into our favorite restaurant for dinner, we saw that a line of Tesla charging stations had been installed in the parking area; while today’s cars may not have a flux capacitor, just like Doc and Marty, you need to find a charging source to get where you need to go.

Why do I say the future is now? Here are a few examples that are happening today that seemed impossible just a few years ago.

  1. The first week of October, I spoke at the Zycus conference about supply chain automation, the internet of things and automation of the procurement process through artificial intelligence.
  2. On Monday, Rio Tinto announced that its iron ore mines in Western Australia are starting operations with driverless trucks. The trucks will be hauling iron ore from the mine to the plant. It’s the first such operation for Rio Tinto and is another step to driving efforts to be the low-cost producer.
  3. While speaking at the Plastics News executive conference last year, I was surprised to learn many of the leading plastics executives are designing factories for lights-out automated operations. There’s little doubt that the war for talent, global pressure for higher wages and changing demographics will drive companies and industries to more automation.
  4. Not surprisingly, traditional brick-and-mortar retailers are giving way to supersized, automated warehouses dedicated to e-commerce. These warehouses were once large at 500,000 square feet and now are reaching 1,000,000,000 square feet. In the US, same-day and next-day deliveries are driving larger warehouses in high density population centers. The investment in automation, robotics and technology are all aimed to achieving the supply chain to meet the same day delivery goals and achieving supply chain dominance and competitive advantage.

My prediction for the future is continued automated supply of the chains, aligned objectives and integration, systems integration and distribution of value based on inputs.

The future is now; can’t wait to see what 2025 brings.

Cybersecurity Watch-Outs – Use Your Contracts Wisely

cyber watchout

This week, I am continuing the heads-up on cybersecurity and what it means for your contracts. I’m fortunate to have a guest blogger, Jeff Mayer of Akerman LLP, to outline areas we should consider. Thank you, Jeff.

Thanks to Bill Michels for allowing me to be a guest blogger today. I have had the privilege of regularly advising purchasing departments and speaking on purchasing law issues, including at national and local ISM conferences, on many cutting edge issues relating to purchasing law, including international contracting, warranties and responding to sudden and unexpected catastrophic events (force majeure). Most recently, as Bill has noted, the hottest topic in contracting is data security, which impacts all the other critical contracting areas, such as warranties and force majeure events. Data security breaches are very real and very costly. In addition to legal risk, there is PR risk, stock price risk and, of course, people can lose their jobs for not taking the proper precautions to mitigate potential breaches. Use your contracts to help. Akerman is fortunate to have an entire team devoted to data security issues and I asked two of those team members, Melissa Koch and Elizabeth Hodge, to outline some of the most critical legal provision for purchasing departments concerned about data security issues. Melissa and Elizabeth’s top tips are:

  1. Be clear on what data is at issue (especially if it will include personal, confidential or sensitive information).
  2. Make sure the ownership rights are spelled out and well understood to help control who has access to the data and how it can be used.
  3. Understand all of the touch points on how the data will flow, who will have access to it, and where it will be stored. This is particularly important if a vendor is going to have access into your company systems. You will want to make sure there are at least industry standard procedures and processes in place to keep the touch points and data safe and secure. You will also want to make sure the transfer of the data complies with all applicable laws. Regulators across all industries increasingly expect data owners to know where the data lives and who is handling it. You will want to know if the data will stored beyond U.S. borders or if vendor employees and subcontractors outside the U.S. will have access to the data.
  4. Pre-qualification reviews, audits and certifications. Take the time to thoroughly evaluate the vendors with whom you will be sharing data, and make sure they are properly audited and certified using current standards. You will want to make sure their ISPs are also audited and certified.
  5. Make sure you have proper recourse in the event of a security incident through carefully drafted indemnity rights and carve outs from limitation of liability. Also verify if the service provider has appropriate cyber liability insurance and the limits on such coverage.
  6. Make sure the service provider is required to assist in transferring data back to you in the event the services agreement terminates. You want to make sure that the contract does not give the services provider to lock you out of access to your data, especially if the data at issue is critical to your business operations.
  7. You should not only demand that the vendor indemnify you, but also that they cooperate with any pending litigation or investigation.

And none of these issues stands apart from other issues that you face in a purchasing department. Just as legal systems vary, making international contracting challenging, so do local laws on data security and privacy. And, unlike other commercial laws, you may not be able to contract out of those obligations. Similarly, your warranties in a contract bear directly on legal obligations related to data security. And any force majeure clause needs to be examined closely to determine whether it provides an out or escape to the vendor in event of a major data breach. While data security issues go well beyond the contract, making sure your contracts fit with your overall data security strategy is just as essential as any other contract strategy.

Contact Information

Jeffrey J. Mayer

Akerman LLP

71 South Wacker Drive

46th Floor

Chicago, IL 60606

Dir: 312.634.5733

Fax: 312.424.1900

jeffrey.mayer@akerman.com

Melissa Koch

Akerman LLP

420 S. Orange Ave.

Suite 1200

Orlando, FL  32801-4904

Dir: 407.419.8422

Fax: 407.254.4213

melissa.koch@akerman.com

Elizabeth Hodge

Akerman LLP

777 South Flagler Drive

Suite 1100 West Tower

West Palm Beach, FL  33401

Dir: 813.209.5052

Fax: 561.651.1597

elizabeth.hodge@akerman.com

 

Are Your Contracts Ready for a Cybersecurity Breach?

lock

I have just returned from the Zycus Horizon 2015 conference, where I was a speaker. The thing about conferences is that you always learn something and yesterday was no exception, especially when I listened to a presentation by Deborah Wilson from Gartner entitled “Cyber Security What the CPO needs to know.” The thing that I found most interesting in the presentation was that all supplier contracts need specific language about risks, obligations and notifications concerning cyber security breaches. Do your contracts contain clauses that address cyber security?

While reading news headlines waiting for my flight, this one caught my eye: “Average Cost of Cyber-crime in the U.S. Rises to $15 Million.” So today I called a few law firms that I have worked with over the years and all of them confirmed that the fastest growing practice in their respective firm. All were now building new contracts with cyber security language. The Security and Exchange Commission issued guidelines that have gotten a lot of attention as companies build the contract language to protect them.

This is a wakeup call to me; many of my clients are highly exposed as they have not added the new language and contract clauses. I will be adding them to my contracts immediately. In next week’s blog, I will continue with this topic by including advice from some cyber security legal experts.

From the FDA warning medical facilities that they should top using a medication infusion pump that was vulnerable to hacking to the highly publicized security breaches attributed to suppliers (one breach was caused by a supplier’s invoice that included a Trojan), you may not think you’re vulnerable, but anything connected to your organization’s network is a potential threat. My advice is:

  1. sit with your legal team to review what language is needed
  2. rewrite the contracts, and
  3. kill the evergreen contracts–nothing lasts forever!

Are you prepared?

Managing Procurement in a Digital World

robot

5 tips for operating in a digital world

Many of you may find this hard to believe, but years ago the buyer’s best resource was the green, multi-volume set of the Thomas Register of American Manufacturers that was proudly displayed on the credenza. This was THE way to search for new suppliers. Today, you recognize ThomasNet.com and their web-based platform for supplier discovery. Things have come a long way since the hardcover green volumes, but I see many companies who, while using web-based searches, are still basically operating in the same way as the “look up a supplier for my item” process. Procurement exists in a world where social media, cloud computing, transition to mobile devices and the internet of things can simplify processes and free up valuable time to focus on more strategic, value adding work.

E&Y in its analysis of Megatrends 2015 reports that “Digital disruption is taking place across all industries and in all geographies. Enormous opportunities exist for enterprises to take advantage of connected devices enabled by the “Internet of Things” to capture vast amounts of information, enter new markets, transform existing products, and introduce new business and delivery models. However, the evolution of the digital enterprise also presents significant challenges, including new competition, changing customer engagement and business models.”

While the E&Y report highlights many megatrends, I want to focus on the digital impact on the procurement leader of the future. It’s obvious that the future for procurement will include connectivity from customer through to the lowest level supplier. It’s also not hard to envision models where computers on routine purchases have the ability to solicit quotes for business, analyze the quotes with decision-support artificial intelligence, place the order based on key rules and complete the transaction when goods and services are received. It’s also not hard to envision the costs and benefits of such systems, leaving procurement to develop longer-term strategies, supplier relationships, new products and work across the supply chain to deliver increased levels of value.

Here are five tips for managing procurement in a digital world:

  1. Align all low spend, low value categories so that they can be managed automatically.
  2. Develop order points, Kanban, blanket order releases, etc., so that they can be automated.
  3. Think about developing intelligence for timing, decision-support and rules for automating the RFX process.
  4. Automate supplier performance reporting and analysis.
  5. Reduce complexity of low spend, low value expenditure by establishing controls and removing human touch points.

These tips are just some of the things that procurement leaders should be thinking about as more and more human work is being transferred to machines and software. Automation of purchasing should be no exception!

Are you automating processes?

Interest Rates and Cost Control—it’s been a wonderful life

Broken-piggybank

10 tips to control costs

This WSJ headline caught my attention: Fed’s Fischer: ‘Good Reason’ to Think U.S. Inflation Will Move Higher.  Vice chairman says Fed shouldn’t ‘wait until inflation is back to 2% to begin tightening.’  This should serve as a warning to all companies that the good times may be nearing an end and we may be experiencing the switch from a buyer’s to seller’s market.

Should interest rates rise, many suppliers and supply chains will feel the significant impact of severely extended payment terms. We’ve been working in an economy where the cost of money is relatively low; as interest rates rise, suppliers and the entire supply chain will be impacted by added costs to support the extended terms. As these costs increase, there’s an additional risk that the front-end of the supply chain may not be able to fund or pass through increased costs, causing severe supply chain risk.

Sourcing practitioners have basically two options for dealing with cost containment: wait until the supplier increases the price, then react, or proactively create a cost containment plan that involves the entire organization.

Good proactive cost containment plans require these 10 actions:

  1. Improvement of functional inter-site and intra-business collaboration
  2. Monitoring external markets and market pressure for price increases
  3. Forecasting the impact of potential price increases on the business
  4. Reviewing all contracts to solidify current pricing and prioritizing cost containment targets with quantified objectives
  5. Researching market and supplier data
  6. Building a supply chain map
  7. Running risk assessments on the supply chain
  8. Conditioning suppliers against price increases
  9. Building tactics for delay
  10. Deterring price increases

I have been around long enough to experience cycles of inflation and these actions have been proven successful when dealing with inflation. The difference today with the inflationary periods of the past are that the extended payment terms across the supply chain make some of the suppliers extremely vulnerable to the increased cost for money.

Sometimes forecasting the economy is like using a Ouija board, but all signs are pointing to interest rate hikes, hence, inflation. So, should you wait? I see it like this, borrowing a quote from Clarence in It’s a Wonderful Life, “You see, George, you’ve really had a wonderful life. Don’t you see what a mistake it would be to throw it away?”

Are you ready for a Seller’s Market?

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.

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?