Tag Archives: purchasing

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?

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

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

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. 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
    • Exclusivity
    • Innovation
    • 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

6 Steps to Acquiring and Delivering Value

value

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?

  1. Assemble expert teams to define future markets for their products and services and develop plans to dominate them.
  2. Define strategies based on differentiation, innovation and cost leadership.
  3. Assess the strategic capabilities that need to be resourced, developed, protected and leveraged ahead of competition.
  4. Exploit the market value of intellectual capital.
  5. Invest in developing internal teams and strategic supply chain partners.
  6. 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?

Getting to NO! – 10 Tips to Improve Tactical Negotiation

getting to no

I have always thought that “Getting to Yes” by Roger Fisher and William L. Ury was one of the best negotiation books ever written. For my business clients (and in my personal life) I add “getting to no” as a technique for tactical negotiation.

One of the most interesting things about Americans is in many cases they’re reluctant to ask for what they want. Whether it’s fear of the other party saying no, worry that they’ll be seem unreasonable or fear of embarrassment, it’s enough to minimize their expectations and sub-optimize any opportunity they may have for improving the deal. Not only should supply managers ask questions, they should set and maintain high aspirations.

A few months ago, I worked in a small food manufacturing company on a project to significantly reduce cost and increase value. A cross-functional team quickly learned that by preparing, understanding the markets, their suppliers and asking enough questions, they were able to build the arguments to support cost and value improvements. By planning to ask questions until they “got to no”, they were able to determine the best opportunities without disturbing the supplier relationship. The result of planned “getting to no” was reduced product cost by 7% with a minimum of resistance in just three months. The savings dropped to the bottom line, which greatly enhanced the company’s profitability. They were amazed by what “just asking” for additional value until there was no more to be gained delivered to their business. All of the parties left the negotiations feeling satisfied with the deal.

Ten Key Tips for Tactical Negotiations

  1. Open the negotiation with high aspirations and maintain your demands throughout the negotiation.
  2. Remember that both parties are at the negotiation table to make a deal.
  3. Always enter a negotiation with research, a plan and a controlled argument from the first contact.
  4. Create multiple options to present to stop the negotiation from getting bogged down.
  5. Use your ability to influence and persuade and switch up methods of persuasion.
  6. Months before the negotiation, manage the other party’s expectations through a series of expectation management messages and events.
  7. Stick to your demands and give few, small concessions.
    Always calculate the cost or value of each concession and build a concession-trading list (if you do this, then I’ll …).
  8. Keep the negotiation focused on key issues, putting minor issues on the back burner.
  9. Don’t just hear or anticipate what you will say next, actively listen and use questions to probe and gather data.
  10. Never respond to pressure and keep pressing for all the cost and value opportunities you can get.

By using these tips, you can dramatically improve your tactical negotiations. While you will still be getting to yes, you will also leave confident that you did not leave anything on the table. Remember, these techniques are for TACTICAL negotiations which occur when you have many suppliers to choose from, there’s a competitive market and a lot of money and value are at stake. For strategic negotiations, you’ll require a more principled approach, which is a topic for another time.

Good luck and don’t forget there is no opportunity for success if you haven’t made the appropriate preparation and plan. If you are working with a team, brief the team, establish roles and practice. While many of us manage very busy schedules, prep in this area has a high return on investment.

Are you afraid of “getting to no?”

Hostage Negotiation –What can supply management learn from the FBI?

hostage

I read an interesting article from one of SourcingChick’s favorite blogs (Eric Barker’s Barking up the Wrong Tree) on how hostage negotiation gets people to change their minds. The more I thought about it, the more it applied to what sourcing people do every day. The article points out six key elements to success.

Ask open-ended questions

This is something that I have done and witnessed for years. Anyone who has participated in the negotiation classes I have taught knows it’s a key technique I encourage everyone to get better at. In reality, we usually don’t want the other party to answer a question with a yes or no. In negotiation the skilled negotiator is effective at open-ended questions striving for understanding the key issues and interests of the other party. By understanding the issues and interests, you can structure a deal that marries the interests of both parties. Think of the Colombo character in the old TV series, “Just one more question.”

Silence and Effective Pauses

Rarely does anyone like silence and pauses, but for the skilled negotiator these are some of the best tools in our toolbox. These techniques encourage the other party to continue dialogue. A pause can be used when emphasizing a point. In the hostage article, silence and pauses are used to diffuse when the other party is highly emotional. This works because it is difficult to sustain a one-sided argument.

Minimal Encouragers

These are brief statements to acknowledge to someone that you are listening and paying attention. It is words like yes, OK and I see. Active listening in negotiation is the core skill of any negotiator whether the negotiation is tactical or strategic. It is not just hearing or thinking of your next statement. It is hearing, listening and giving feedback.

Mirroring

This technique is one that again shows your empathy and listening skills by repeating some of the dialogue that you have just heard.

Paraphrasing

This technique is where we demonstrate that we heard and understand what our negotiation partner said. This is best done by repeating what the person said in your own words. I think it is a great way to insure that you are onboard with what has been said and clarify any misunderstandings or miscommunications.

Emotional Labeling

The FBI suggests that you give their feelings a name. This shows you identify with how the other party feels. Statements like “you seem pretty hurt about being left behind” or “it just doesn’t seem fair” are examples of emotional labeling.

Overall these are clearly skills that will aid in any negotiation. The core skills from the FBI are active listening, empathy, building a rapport, using influence skills, and creating behavioral change. I think this is a good process for procurement managers who are involved in a tough negotiation. While I have taught these skills, it always good to keep them up-front in your challenging negotiation.

We can learn a lot from behavioral negotiation!

What’s the organizational life span of the Chief Procurement Officer?

Business man protecting new business growth concept

When I started working, the head of purchasing had a job until he retired and then next person-in-waiting usually took the helm. Today it seems that our Chief Procurement Officers have about the same longevity as a coach in the NFL or MLB. In the past year or so at least seven of my friends and colleagues holding the position of Chief Procurement Officer experienced unplanned exits from their organizations. Many of these CPOs had a very big public profiles, they all made a large contributions to the organizations they served, all were actively engaged on the Management Executive Committee in their firms and in some cases were driving key projects with Board of Directors visibility. I’ve discussed the short lifespan with industry experts and other consultants who have seen the same trend for the CPO. It’s been researched and reported by CAPS Research whose study of CPOs in 2014 reported that the more than half of the CPOs in Fortune 500 companies had been there for less than 4 years and that only 10.6% were promoted to the position from within. The study also found that very few CPOs were promoted to higher executive positions. What can be done to prolong the lifecycle of the Chief Procurement Officer?

The Chief Procurement Officer may be more vulnerable than the Chief Executive Officer with an average life cycle of about 5 years. There are ever increasing expectations that CPOs will deliver continuous deliver cost and value improvement, align with multiple business units and objectives, service the business in a matrix organization structure, manage myriad stakeholder demands, work globally across borders, accelerate speed to market, integrate the supply chain and manage merger and divestiture activity.

The longer the CPO is in place on the job, the more difficult it is to rejuvenate and create new strategies to continue the generation of continuous cost reduction, which is still the primary measurement in many businesses. As new initiatives become increasingly important, the organization expects the CPO to be proactively ahead of the curve on programs like risk management, sustainability, re-shoring, big data strategies, best country sourcing and leaning out the supply chain.
How can CPOs increase their lifespan? Here are 3 key strategies for survival:

1. Talent Management

To be effective in the organization, the CPO requires a top team to execute the global strategies, align and support the business, architect the supply chain, and drive the metrics that will change management focus from cost to value delivery. Talent is scarce and there is a lot of competition between CPOs to recruit, develop, and build a team capable of executing a world class results based global strategy. The inability to develop a world-class team as a prime objective is one factor in shortened longevity on the job.

2. Total Cost Focus

It is critical that the CPO educate management on the Total Cost of Ownership and value extraction from the supply chain. A CPO with a sole focus on continued price reduction is destined to fail. While everyone likes reductions, we know that suppliers are not a source of incremental margin for the buying company. All suppliers need a healthy margin to reinvest, innovate and drive industry changes. With the ability to conduct cost analysis, there is little doubt about the transparency of cost. If a CPO with a strong emphasis on price reduction will soon run out of runway and require new suppliers and additional sources to drive margins down forcing industry consolidation.

The real opportunity is value enhancement and true cost reduction through specification change, redesign, capital investment with faster cycle times and least cost sourcing. In addition reduced warranty, risk mitigation, speed to market, target costing and innovation will play a role of increasing importance in future CPOs. Ignoring these will be a sure way of sealing the fate of the CPO.

3. Get a Seat at the Table

In the future, the CPO will play an increasing role in business success. It is essential that they play a key role in the executive management of the company, report to the CEO and have some accountability to the Board.

Currently, purchasing expenditure accounts for about 50% of a business’ cost. I see this increasing with global sourcing, outsourcing, industry consolidation, and value maximization. The ability to integrate suppliers in the supply chain, drive for least cost production, and increased levels of value and supplier relationship management will ultimately drive the lifespan of the Chief Procurement Officer.

Time to take inventory and assess your phase in the company lifespan.

Change or be changed.

Supplier Innovation: Fact or Fiction?

 

chair photo

This week, I am inspired by an article in the McKinsey Quarterly, Google at Work’s Atmosphere webinar and a chart tweeted by HBR. All focus on innovation and I highly recommend that you read and view them (after you read my blog, of course). Innovation is exciting and we’ve all heard and read about innovation from suppliers, but here’s a sad fact: While almost any CPO will commit to capture supplier innovation, very few have the process and capability to do so. So what are the essential elements that drive supplier innovation?

Many of the companies I have studied still place procurement’s priority as driving prices down, extending terms and managing a series of tactical relationships. None of these practices are a recipe for creating more strategic relationships that provide innovation, investment, mutual benefit and interdependency to excel in the supply chain. Effective supplier relationships are founded on a sound strategy, planning, commitment, trust, joint effort, investment and significant rewards for everyone involved in driving innovation. You’re probably thinking, “Sure, Bill, I’ll start doing that today.”

Innovation is a company-wide, complex endeavor requiring cross-cutting practices and processes to structure, organize and encourage it. The same could be said for supplier innovation; it’s hard and few supply organizations have developed the capability to capture innovation. There’s no magic formula and definitely no prescriptive flowchart that works for every company. There are great examples of success that we can learn from. One great, successful process to capture innovation is Roche/Genentech’s Supplier Relationship Center where suppliers and researchers reside to develop breakthrough projects leading to new products, processes, cost and value enhancement from which both parties benefit.

While it’s difficult for many companies to develop innovation centers, it is feasible to develop a supplier innovation fair. I had to do this in my career when my company built a product without supplier input. When the product failed, we realized that there was an opportunity to learn and get help from suppliers. The product had hundreds of components, so we created a display of all sub-assembles and parts for the entire product and invited suppliers to review the product. For any supplier identifying innovative ways to redesign, cost reduce or improve the product, we agreed to give them business for several years. The result was about 250 ideas of which 62 were implemented, driving a better product, more efficient manufacturing, lower cost, improved warranty issues and new suppliers. A supplier innovation fair is a simple process that requires top management commitment, technical expertise, manufacturing knowhow and open mindsets. There must be a dedicated cross-functional team to review the ideas. One key to success is quickly reviewing the ideas with feedback to the suppliers, who need to dedicate expense, resources and effort for your company’s process. Companies fail at innovation if they never acknowledge the supplier’s effort, ideas and provide quick feedback. Suppliers will make investments if they are rewarded and treated with respect.

Supplier innovation is real if you get a management mandate, create a process, involve a cross-functional team to commit to the process, provide suppliers with incentives to support the program AND learn how to ask questions. Like Tim Brown, co CEO of IDEO said in the Google at Work webinar, start with a question, not an idea. Ask the question, then explore the idea. Frame the question in the right way; to steal Tim’s example, don’t ask “how can we change this chair”, ask “how can we sit differently to make our conversation better.”

Supplier innovation is possible. To achieve it:

“the funny thing is we actually banned the word “supplier” from being used at the center. We are partners, working together, trying to bring success to both our organizations.”Clive Heal, Roche GPP Innovation Center of Excellence Team Leader

Millenials Rule the Workforce

 

Millenials Take over the Workforce

While watching the news this morning, I saw a story based on Pew Research that the Millennials now make up the largest part of the US workforce. The children of Baby Boomers and Gen Xers, the millennial generation were born 1981-1997 with approximately 1/3 of US workers (53.5 million workers) belonging to that generation.

The shift to a new generation provides both opportunities and challenges. As employers, we need to recognize this generation has a very different outlook on work life balance. They tend to prioritize things differently than previous generations. In fact, the CNN report this morning mentioned Millennials preferred midsize companies to larger companies and will opt for lower salaries in an organization that’s fun to work in over a rigid firm with a defined structure. This is the first generation to have a true freelance, independent attitude rejecting the traditional 9-to-5-employment structure. As a group, Millennials tend to reject career path planning and enjoy the flexibility to move from company to company. Another article I read predicts that Millennials will experience over 25 jobs in a lifetime.

The implication for those of us who are locked into the corporate mindset is that we will have to change the way we and our companies operate to attract the best talent. It’s time to start making adjustments to our employment plans, companies and work environments if we are to attract, retain and grow supply chain and operations talent. The stronger implication is that rigid corporate structures will have the modified to accommodate the group that now makes up the largest portion of the work force. Especially if we want to attract Millenials to manufacturing, especially in purchasing and supply chain.

Change is always hard, but necessary, if our companies are to survive.

Welcome, Millennials, time for us to pass the torch.

Congratulations on your 100th, ISM

ism-conf-2015

Milestone for Supply Management

Today I’m dedicating my blog to the Institute for Supply Management, a group that I have been a member of for over 40 years. Next week at the ISM2015 Conference, the organization will celebrate its 100 year anniversary of serving purchasing and supply management practitioners and their organizations.

The backbone of the organization is the large volunteer group that supports the organization. These volunteers have recruited, educated, and supported the organization with countless hours throughout their careers with many continuing into their retirement. These active volunteers come from all career levels from student through CPO. When I first joined as an entry-level buyer, it was the volunteers of the Central NY PMA who helped me find the right educational events and are the reason I continued my membership as my career took me from central NY to Watertown NY, then to Cleveland and to Detroit and to the opportunity to be an ISM employee for 3 years. The networking and volunteer experience helped me develop leadership and presentation skills that enhance the skills learned through my work experience. I am extremely grateful and owe these volunteers a lot.

As an organization, ISM has provided educational programs, certification programs, conferences, seminars, research and practices that drive the organization and the profession forward. In the last 10 years especially, the profession has experienced rapid growth, technology change, process change and integration into larger supply chains. The Institute for Supply Management has always been at the forefront of these changes, providing global reach with local touch through the volunteers and affiliates to the profession moving forward.

As I look to future, the role of the ISM will no doubt change with technology, business practice and talent changes in a rapidly changing environment. The organization faces stiffer competition than ever with many new entrants into the education and certification association space and the membership growing globally as supply chains become more integrated.

I’m looking forward to seeing ISM strategically move to serve the future needs of its members and their companies. Congratulations, ISM on 100 years and

I’ll see you at ISM2015 in Phoenix next week!