Tag Archives: purchasing

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!

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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?

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

 

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?