Last week I attended the Zycus Horizon 2016 conference and was reminded of a conversation I had early in my career with a Chief Executive of a major food company. I’d completed a current state analysis of the business and needed to report on the team’s performance. Procurement’s performance was poor with limited cost improvement, poor coverage in volatile commodity markets and lots of complexity as the team had excessive spot market transactions, no risk analysis and limited supplier management. After reviewing the results with this executive, he was obviously aggravated and demanded to know who should be fired!
My response was a complete surprise to this executive; I told him that management’s expectation was low, there were no targets for cost improvement, no requirements to hedge commodities to protect the plan, limited engagement with the supply base, no requirement for innovation or value. The CEO paused and said, “I guess I should fire myself.“
5 Things that CEOs and CFOs should expect from the procurement team:
- Cost management
- Value Management
- Supplier innovation
- Speed to market
- Improved warranty
- Improved cost
- Continuous improvement
- Supplier investment
- Complexity reduction
- Business strategy alignment
- Supplier relationship management
- Internal and external collaboration
- Supply chain mapping, audit and risk management plans
It is unfortunate that Procurement’s past haunts its future ability to be strategic. I believe that value extraction will be the key to procurement leadership in the future. Is it better to gain a few cents on a product or be the first in the market? Is it better to save a few cents on refractory bricks in a glass furnace or develop a brick that extends the life of the furnace one year? It’s time to raise the expectations for the procurement team and deliver the performance that adds to shareholder value.
Are your expectations getting in the way of success?
Photo: My team manager Cubs Hall of Famer Andre Dawson helping set my expectations before my next at bat at the fantasy camp championship game. I was hitless at that point, but after Andre changed my focus, I got a hit off A’s Hall of Famer Rollie Fingers!
I was fortunate to be invited to speak at Ardent Partners CPO Rising 2016 conference at the Harvard Club in Boston, where an exclusive group of Chief Purchasing Officers gathered to share best practice, network with colleagues and understand the issues that will likely impact them as we see major shifts in our profession resulting from the digital disruption, changing workforce and continued globalization. Over the day and a half, I consistently heard these five key issues that keep CPOs up at night:
- The lack of skills needed to meet future needs
- The need to continually adjust processes to meet the constant changing business needs
- The need to align the supply chain with the organization’s strategy
- Risk management
- Managing mergers and acquisitions
I don’t see these issues being resolved easily and it is more evident than ever that the CPO must continue to adapt to change and develop the capability to reengineer business process as the environment changes with mergers, acquisitions, divestiture and business strategies impact the organization, process, systems and people.
CPO Rising 2016 was topped off with Andrew Bartolini inducting Tim Cook, Hal Good, and Gregg Brandyberry into the CPO Rising Hall of Fame. Congratulations to Andrew and his team on creating such an impactful event.
Can you help your CPO sleep better at night?
This month is National Slavery and Human Trafficking Prevention Month. The President’s Interagency Task Force to Monitor and Combat Trafficking (PITF) is a cabinet-level entity created by the Trafficking Victims Protection Act of 2000, its mission is to coordinate the the efforts to combat human trafficking. In the PITF Fact Sheet released earlier this month, Procurement and Supply Chain is named as one of the 4 priorities. The PITF meets annually and is proposing some new measures sure to put pressure on organizations like the fishing industry and retailers who unknowingly purchased product where trafficking was involved.
I mention this in my blog because I have long held the belief that it is impossible to responsibly source internationally from one’s desk in the US. Unfortunately, that’s the practice that a large number of companies engage in. They locate sources of supplies through trading companies, brokers or stumble across them on the internet. In many cases employers enjoy the cost benefits from global sourcing, but fail to see the value in the required due diligence of investigating the entire supply chain and creating relationships with suppliers. They are concerned about the budget and expense of travel and fail to see the damage that the company can be exposed to if the product has a reputation risk or bribery issue.
It may seem like a prudent move, but it can land a company in a PR, regulatory and customer nightmare. My experiences with international sourcing are that I have found that the trading companies and brokers are often not concerned with product consistency, CSR, dedicated manufacturing sites and sanitation. The customer orders are coming in and the customer is content to stay in the US and fork out money, so, why worry about anything but price and delivery.
Some things I’ve seen are food companies processing materials in rusty metal cans, unsanitary plants, machinery incapable of holding tolerances, safety violations capable of great harm, death and life-long disabilities and the list goes on. I have also seen the most modern robotics and invested capital to assure consistent, safe and least-cost manufacturing in many foreign companies. The trick is to survey and understand the supply chain, visit the supplier and make sure your company is not exposed to reputation damage from the global supply chain. Understanding the culture and building strong relationships with foreign entities is even more important when sourcing globally.
Here are 5 key tips that I recommend:
- Never source from your desk; visit the supplier
- Include the cost of visiting suppliers in your cost reduction analysis
- Always visit the suppliers and consider contracting resources in the region to be your eyes and ears
- Look for all health and safety issues, create extensive interviews with principals
- Develop strong CSR and Sustainability policies that the suppliers must sign and agree to
The PITF is creating resources to help, including the release of the online Responsible Sourcing Tool this month. Use these resources and read up on USAID’s new Supply Unchained initiative. Look into the tools offered by ISM like the Supplier Risk Tool and CIPS’ Sustainability Index. And most importantly,
Get up from your desk and visit suppliers.
The latest U.S. employment report seems to have given the Federal Reserve a strong signal to bump interest rates after it failed to do so in September. Employment increased by 211,000 people following a gain of 298,000 in October that was bigger than previously estimated, easing concerns that manufacturing activity is slowing.
While the interest rate increase is expected to be modest, it will have an impact on procurement activity and supply chain finance. Before looking at the impact of raised interest rates, let’s look at the impact of reduced loan availability a few years ago and extended payment terms–stretched from 90 to 180 days in some industries. These extended terms have fueled a booming factoring market where suppliers sell their receivables at discounts that are far higher than loan interest rates to maintain cash flow. Not only is the sustainability of this practice in question, but it becomes difficult for a company to compute true days sales outstanding. So, can the supplier who factors or the buyer who relies on liquidity calculations as part of risk management really know where the company stands? Higher interest rates will not help a company stop this sell-receivables-today-to-fund-new-sales-production cycle.
We have become comfortable with low cost money and when that cost is increased, it will have a serious impact on low margin, high volume suppliers who are essentially financing the supply chain for the end customers. Labor costs will likely be impacted as the cost of credit cards, hard goods, homes and automobiles carry the increased interest rate cost to the consumer and workers will look for higher wages.
While the interest rate hike will not be a surprise, the market change from a buyer’s market to a seller’s market may catch some procurement and supply chain professionals by surprise, who in many have not lived through periods of inflation and increasing prices.
While I hope that the impact is minimal, I am advising all of my clients to complete a financial risk assessment of their supply chain, dust off cost containment processes, retrain their teams and review all contracts.
In times of uncertainty, its always best to drive a proactive approach.
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.
- 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.
- 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.
- 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.
- 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.
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?
How fast does your team react to available data?
In Supply Chain24/7’s news yesterday, the headline read diesel prices decline for the 12th straight week. “At an average of $2.615 per gallon, the price is down 0.2 cents compared to last week, with prices dropping a cumulative 29.9 cents going back to the week of May 25, when the average price was at $2.914.” What will you do with this data?
The challenge for the procurement and logistics teams is translating this data into cost reductions. There should be a parade of transportation companies eliminating surcharges and reducing cost, but I’m guessing suppliers aren’t coming to you. Your team should be acting on their plan for value enhancement now. One of the key characteristics of a good cost manager is to constantly monitor the suppliers and the supply markets. While there is no doubt that the fuel cost structure for for all freight companies is declining, they’re probably constructing arguments for other areas where costs have gone up. Customers should be prepared for this and be sure that their cost structure reflects the market changes.
Astute supply chain practitioners realize that, if unchallenged, the logistics suppliers will have the opportunity to significantly improve margins, while their costs are essentially remaining the same. The savvy purchaser will:
- Know the impact of fuel on the pricing structure
- Ask for the appropriate decrease
- Shake up the market with a competitive bid (if suppliers are unwilling to pass along the lower cost)
- Develop a longer term hedging strategy
- File away the lower fuel price impact data for use in the next negotiation.
What is your plan?
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