Tag Archives: purchasing

Supply chain and Procurement – The Decade in Review and Key Strategies for the Decade Ahead

Current State of Procurement
Working with some of the world’s best companies has given me a good view of procurement and supply chain over the years. As we exit 2019, we’ve made much progress, elevating the importance and status of our profession. Many firms have clearly articulated strategies that deliver year on year price reductions, restructured operations to separate transactional activity from strategic activity, and have designed multiple supply networks to meet the needs of specific market segments.

Overall, as procurement professionals, we have failed to progress developing rigorous category strategies, planning, and fail to optimize the opportunities available from detailed plans and well-executed cross-business/cross-functional business category strategies. Many of the firms I have visited in the last three years are just now embarking on developing a category planning approach. Many companies are still working with a centric, functional approach rather than recognizing that procurement is a business-wide process. Many businesses tend to have an annual, sometimes even quarter by quarter, business horizon rather than a forward-looking multi-year strategy. Many firms have not sufficiently invested to leverage technology to manage the current state and are in no position to look to the future state where data analytics and digital disruption will be a way of life. With robotic process automation, the internet of things, and automation with Artificial Intelligence are considered futuristic, and the reality is that they are here now. Data scientists are in high demand among progressive procurement, and supply chain-oriented companies.

The most surprising thing to me is that most companies do not have detailed maps of the suppliers in the supply chain. For me, this is some of the most critical intel a procurement or supply chain executive must have. It is impossible to have social responsibility, anti-slavery/forced labor, environmental or risk management programs without knowing all the suppliers in the supply chain. Knowing just the suppliers in tier one is not enough.

While we have made significant progress in the past decade, the challenges of a rapidly changing environment will force our firms to have renewed strategies that are forward-looking. The days where we chased low-cost labor around the globe are in our rear view. Far too often found out too late that our source of low labor costs put us at risk from natural disasters, political regulation and was temporary at best as standards of living are on the rise. In all cases, automation offsets low-cost labor. Robots work 24 hours a day, 24/7, never get tired or sick, and quality and productivity are consistent. Another lesson is that many organizations are building facilities close to the markets they serve in smaller footprints, making the supply chains more secure, agile, and flexible.

Strategies for the next decade

  • Enhance category management and develop robust strategies that are forward-thinking
  • Redesign the procurement process with the understanding that is a business-wide process with many owners, not a functional activity
  • Invest in bringing the technology up to manage the current state. Many companies are reluctant to invest in technology. Failure to do so will put the company at a competitive disadvantage and perhaps extinct
  • Build a TCO approach focused on total value. You could be getting low prices but higher production or management costs
  • Develop full supply chain maps of the supply chain along with real social responsibility and risk management programs
  • Provide the procurement teams with a comprehensive business orientation; in the past decade some organizations have compartmentalized jobs. When this is the case, individuals and groups fail to understand the business, company, and business strategies.
  • Manage succession planning and develop bench strength and a continuous recruiting
  • Develop a supplier relationship management program that rewards innovation, speed to market, business alignment and value contribution
  • Develop the individuals and teams in your business. Many groups need a program that goes back to basics and develops the population to build, drive and execute well-planned category strategies
  • Develop and train procurement leaders to look forward and create new processes, systems, and comprehensive business programs to cope with digitization, disruption, rapid product change, and supply chain agility

The changes I have seen in procurement have been challenging, exciting, and thought-provoking. The reality is that we are at the crossroads of change. While you may not agree with the current state of procurement and strategies for the future, I urge you to assess your organization and make a strategic commitment for the decade ahead.

Are you ready for the 2020s?

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!

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