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:
- Align all low spend, low value categories so that they can be managed automatically.
- Develop order points, Kanban, blanket order releases, etc., so that they can be automated.
- Think about developing intelligence for timing, decision-support and rules for automating the RFX process.
- Automate supplier performance reporting and analysis.
- 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?
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Tagged digital processes, E&Y, eprocurement, future trends, megatrends 2015, procurement, procurement leaders, purchasing, purchasing processes, sourcing processes, ThomasNet
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:
- Improvement of functional inter-site and intra-business collaboration
- Monitoring external markets and market pressure for price increases
- Forecasting the impact of potential price increases on the business
- Reviewing all contracts to solidify current pricing and prioritizing cost containment targets with quantified objectives
- Researching market and supplier data
- Building a supply chain map
- Running risk assessments on the supply chain
- Conditioning suppliers against price increases
- Building tactics for delay
- 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?
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.”
- Review and update all risk management plans
- Review all customer and supplier contracts
- Build best and worse case scenario forecasts
- Understand all international contracts adjusting for currency fluctuations
- Audit the supply chain
What’s your strategy?
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.
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:
- Supplier relationship management is becoming a core competency
- Value creation is more desired than price management in the future
- Innovation transfer is required for the success of the entire supply chain
- There is a movement toward portable manufacturing
- Contingent work forces are becoming more prevalent in business
- Internal and external collaboration is a business requirement
- Business strategy alignment will be required between all links in the supply chain
- Distribution, logistics and asset management will be a bigger priority
- Life cycles are becoming shorter
- 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.
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?
You’ve tied the knot; is it effective?
Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”
Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.
Characteristics of Ineffective Sole Source Supplier Management
- No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
- Fear of upsetting the supplier
- Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
- No defined process, defined leader or coordinated cross-functional approach
- Supplier holds the power in the business relationship and defines the value delivered to the customer
- Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
- Typically the relationship with the sole source has tension and is somewhat adversarial
- Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
- Focus on price rather than value extraction
- Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success
While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.
To become effective with strategic supplier relationship management:
- Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
- Speed to market
- Speed of response
- Joint customer and supply chain integration
- Principles around cost transparency, margins, and investments
- Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
- Create joint value targets and incentives for both sides.
- Develop closer business integration.
With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.
The Future is Now
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Tagged CRM, negotiation, procurement, purchasing, risk management, single source, sole source, SRM, supplier relationship management, supplier relationships, supply chain
The market destroys companies that fail to deliver value!
Business success is the result of superior performance of a product with extraordinary levels of service and compelling emotional value sold at the most leveraged price. Without fully understanding the supply chain, value proposition and markets, this cannot occur. Executives in most industries are adapting to shorter product life cycles, rapid commoditization of once differentiated products and weakening of prices by customers with leverage. The strategies and operational initiatives that delivered value last year are losing their impact today.
What does it take to acquire and deliver value? In my experience, the conditions for success are:
- The business and supply chain are aligned to deliver superior customer value.
- Knowledge and capability exists internally (in the company) and externally (in the supply chain).
- The focus is on products where only a small fraction of the value is being deployed (thus making it a prime target for renewal development and leverage).
- Value must meet customer needs, stakeholder needs and shareholder needs.
- Value must be defined, which requires a detailed understanding of the relationship between price and functionality of products and services.
- The total organization and supply chain must buy in to the value strategy.
The combination of functionality of product or service offered to the customer (the value of utility), the price they will pay and the emotional impact (the value of esteem) results in true value. It is inevitable that companies will need to integrate and align the supply chain to meet business objectives and achieve success.
What are the six steps to achieve these conditions for success in value optimization?
- Assemble expert teams to define future markets for their products and services and develop plans to dominate them.
- Define strategies based on differentiation, innovation and cost leadership.
- Assess the strategic capabilities that need to be resourced, developed, protected and leveraged ahead of competition.
- Exploit the market value of intellectual capital.
- Invest in developing internal teams and strategic supply chain partners.
- Define and extract value.
When looking to suppliers to acquire and enhance your product’s value, it’s important to understand that acquiring and delivering supplier value does not rest solely on the procurement or supply chain teams; it is a business-wide process. Without a forward business strategy, investment, alignment and business-wide participation, value will not be optimized for your company, your suppliers or your customers.
How will you ready your company for the challenge ahead?