SUPPLY CHAIN RESOURCE COOPERATIVE

Every fall, Betty Minton and Bill Collins (my trusted and capable student project advisors) and I play a game of musical chairs.  The challenge involves matching a group of bright, eager, and hungry young MBA and engineering students to a group of projects identified by a group of companies, through the now well-established Supply Chain Resource Cooperative in the Poole College of Management.  This is much less of a science than an art, and is a rather delicate balancing act.  On the one hand, we ask students to rank the projects based on their preference, but we also must consider the unique skills, knowledge, and capabilities that each students brings with them to the project team.  We also have to work around their schedules, to ensure that they can meet every week with the practicum advisors!  These preferences and skills must then be matched with a partner company project.  This year was no exception, and we have a cadre of bright MBA, industrial engineering, and manufacturing system engineering students lined up to work on the following projects:

American Red Cross – Procurement Card Analysis – Reviewing spend analytics  through p-card buying channels, and identifying key trends and consolidation opportunities.

Center for Environmental Farming Systems (1)   – Dairy Farming Project – Helping to create a transition plan to Austin Family Dairy Farm, a 75-Jersey cow conventional dairy farm located in Yancey County, North Carolina.  The team will assist the Austin’s with a transition plan and identify metrics (and record keeping needed for these metrics) so that the Austin’s and other transitioning dairies have a heightened chance of success as they move from suppliers of raw milk, to small businesses producing finished dairy products for sale.

Center for Environmental Farming Systems (2) – Meat Production – Gather information on the type and volume of meat by-products from cooperating niche meat processors in NC, identify metrics around market channels for these products, and make recommendations to individual processors and to the group of processors as a whole (should they wish to aggregate their by-products for sale or for disposal) based on analysis of the most cost-effective methods of sale and/or disposal.

John Deere (1)   – Product Value Analysis – This team will seek ways to increase the global competitiveness of the Stand On Mower product line by focusing on product specifications, features, performance, costs and assessing the strengths and weakness of each product line and build recommendations for cost improvement.

John Deere (2) – Life Cycle Cost Benchmarking – The team will benchmark industry leaders to document and define best practices for measuring direct material cost over the lifecycle of a product. The team will work with benchmark participants to understand how cost reduction is achieved during product development as well as in production.

John Deere (3) – Total Cost of Acquisition – The team will work on building a new total acquisition cost metric for purchased components. The team will benchmark industry leaders to document and define best practices for measuring total acquisition cost.     

Lenovo – Fraud Analytics – The team will work on building an estimate of the magnitude of service parts fraud which will include designing a process with  prescribed data preparation, analytical models, and an alerting system that can be leveraged by a business analyst.

Met Life – Procurement Market Intelligence – The team will study how our current market intelligence and analytics offerings align to the needs of our Procurement teams, and study how other providers or additional services through existing providers that could fill these gaps.

First Citizens – Spend Analytics – The team will conduct a full spend analysis of First Citizen’s supply base based on currently available data and provide recommendations for supply base consolidation.

What do all of these projects have in common?  You guessed it – ANALYTICS!  All of the teams will focus on deriving and consolidating metrics that make sense, from structured or unstructured data.  The teams are getting kicked off this week, and will soon begin developing their scoping documents to understand how to best wrap their arms around these problems.

It is no surprise that the upcoming theme of the SCRC meeting in December is also going to be analytics…more on that soon!

 

 

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In the recent issue of Industrial Biotechnology, Jay Golden and I published a set of insights related to the challenges that exist as part of the industrial biobased economy.

As part of the reauthorization of the 2014 Farm Bill, we were tasked to undertake an analysis to address these gaps and report our findings to Congress.  Specifically, Congress required answers to the following six questions: 1) Quantity of biobased products sold 2) Value of the biobased products 3) Quantity of jobs created 4) Quantity of petroleum displaced 5) Other environmental benefits 6) Areas in which the use or manufacturing of biobased products could be applied or distributed more effectively, including identifying any technical and economic obstacles and recommending how those obstacles could be overcome. That work culminated in the recently released report, ‘‘An Economic Impact Analysis of the U.S. Biobased Products Industry: A Report to the Congress of the United States of America’’  which sought to identify key challenges that will be need to be addressed to create the new biobased supply chain of the future.

Several key insights emerged which we discuss in our article:

Insight #1: The Industry Requires Improved Product Data Codes and a Reliable Tracking System

Insight #2: A Lack of Financing, Capital, and Tax Incentives Is Restraining Sectorial Growth & Job Creation

Insight #3: The USDA BioPreferred Label Can Gain Even Greater Utility with Industry

Insight #4: The BioProducts Sector Benefits a Much Broader Segment of America

Insight #5: The Industry Would Benefit from a Research-Oriented Consortium

Insight #6: The USDA Should Expand the Reporting on the Economic Impacts of the BioProducts Industry

Insight #7: The Federal Government Can Do More in Purchasing Bioproducts

Insight #8: The Industry Needs Congress to Appropriate Funds Already Authorized

Insight #9: Successful Technology Development Depends on Improved Execution and Business Fundamentals

These issues provide important guidelines for both industry an government to think about.  Our work in this area is proceeding to continue to drive more insights into how to move forward…

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I have been having a number of fascinating interviews with Chief Procurement Officers this past week on the subject of procurement analytics and supply management risk.  This is part of a study I am doing that will result in a white paper later this fall, and will likely be one of our key themes for the upcoming SCRC meeting this December.

Supply chain risk management brings up a whole host of issues – and as one executive pointed out, is rather a sophisticated concept.  Many companies have Enterprise Risk models that they use in their organization that is typically a common format that can be used across different functions to refer to risk.  But when such frameworks are translated into supply chain terms, several problems arise, as the typical concepts of risk probability versus impact are not always easily transferrable.

One of those risks involves “protecting production at any cost”.  This is often stated in the context of manufacturing, large chemical or oil production facilities, or any major turnaround project.  The problem with this concept is that operations people are often willing to go to ridiculous measures to protect production, conjuring up scenarios that are just plain silly!  They range from over-engineering unique (vs. commercially standard) parts that create excessive quality and procurement costs, to squirreling away MRO parts and inventory in places that no one will ever find them, including the operators, all in the name of risk!  But when companies do further analytics on excessive inventory, they eventually realize that about 80% of it is non-critical. In addition, most of that is readily available off the shelf from suppiers that are within 12 hour distance!

A really interesting supply chain scenario at a large oil and gas company involved the procurement of large haul trucks.  This company has over a billion dollars of capital invested in these trucks, not to mention the maintenance contracts which are a lot more.  The procurement group had convinced themselves that to manage risk we had to have two suppliers – Komatsu and Caterpillar. But leaders at the company began looking at what airlines such as Southwest Airlines were doing.  Southwest uses a single model airplane, the reliable 737- with massive efficiencies that follow in terms of interchangeability and availability of parts, maintenance,  etc.  The argument was always that yes, there were opportunities, but wasn’t there a massive risk associated with using a single supplier?

The team then set about seeking to describe what the risk entailed in more detail.  The outcome was that they discovered that there really existed  a false sense of security, and that by having two suppliers in that case, any existing risk could be mitigated  in a number of different ways.  To begin with, neither Komatsu nor Caterpillar were likely to go bankrupt if the buyer stopped buying their product!  Second, the ability of the supplier to raise prices was limited and in fact likely to decrease when a single source contract was established.  Ergo – the perception of risk disappeared, and the strategy changed, and significant efficiencies and cost savings emerged as well!

One of the most overstated elements of risk is credit risk, or the probability that a supplier will default, go bankrupt, and shut down production.  This is certainly the case in very specific industries governed by FDA or FAA where parts must go through an approval process and when there is only a single supplier available.  However for the majority of spend in areas like indirect, the probability of default is not only low, but the real risks are completely different.

A lot of companies tell you that you need to be alerted to credit ratings of suppliers whenever they go south, or other issues regarding cash flow that might be coming up.  However, many executives I spoke with made decisions NOT to purchase these systems – as the cost compared to the eventual benefit might only arise in isolated cases, often associated with direct manufacturing sources.  For indirect spending areas, such systems are effectively useless.   Risk management in services often simply involves making sure the buyer has certificates of insurance of when they do work on site, and making sure there are disclosure agreements when they transfer sensitive information.  A simple set of actions, for the key strategic suppliers (often 40 or less) mitigates almost all of the real sources of risk.

At a recent IACCM conference, one of the speakers was the state attorney general for New York who was the head of auditing. She quoted an interesting statistic.  New York was dealing with over 700 companies that had declared bankruptcy that they had commercial contracts with – in 54% of cases the auditing firms did not reveal a potential issue in their audit reports. Think about this astounding fact:  you have outside independent auditors crunching the numbers on suppliers deemed to have a high credit risk and who have ALREADY declared bankruptcy –  and in over half the cases didn’t identify a potential problem!   If that is the case – then why invest in companies to even monitor credit risk?  This corroborates some of the student research we did in a study of supply disruptions on major projects.  The correlation between credit risk and the incidence of supplier disruptions was – you guessed it – a big goose egg.

Those type of examples come up often.  And people are prone to want to always default to the lower risk option, whether it involves extra inventory, using a supplier you don’t need, or buying risk software that alerts you to risks that will likely never happen.  Sometimes, people just need to use common sense and logic, and think about the return on such investments.

 

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As organizations continue to discuss the notion of procurement value transformation, there is a noticeable gap between the stated intentions of organizations to pursue value, and their actions as they pertain to on-going adversarial approaches to supplier relationships.

As Gerard Chick and I noted in our recent book “The Procurement Value Proposition” (2015), many organizations see their supply function as a key driver of competitive advantage. Procurement is at the heart of supply chain management but supply chain management shifts the focus from direct, relationships between buyers and suppliers towards entire end-to-end supply chains. In many organizations procurement is now an integral part of the supply (chain) management function, focused on the management of the part of the upstream, supplier-focused, supply chain (sourcing).

Whereas the focus of procurement is clearly on supplier relationships, the focus of supply chain management is on the wider business system that includes several layers, or tiers, of suppliers, sub-suppliers, customers, distributors and so on. In some ways supply chain management has absorbed a number of business functions involved in the process of supply, including procurement, operations, logistics and distribution management.

Today across many industrial sectors the proportion of value that stems from the supply chain is almost 80% and in many companies the outsourcing ratio can be greater than 90%.  The consequence of the outsourcing trend is that companies become heavily dependent on the performance of their suppliers and therefore need to make sure that suppliers are effectively managed as if they were an extended part of their own company.

As a central function working with suppliers, procurement plays a key role in the management of supplier relationships. This role is not only a matter of cost reduction, although saving money remains a priority for any procurement organization, but it is also about ensuring that the need for a range of criteria, including for example quality, delivery, innovation and service, are being met by suppliers.

Moreover the changes witnessed in the last thirty or so years have brought with it a new complexity; and the need to procure complex performance requires not only deep collaborative relationships with suppliers, often spanning multiple decades, but also an understanding of how complex outcomes are articulated over time through a combination of contractual incentives and collaborative relationships, requiring new skills and competencies from procurement people. The need for developing effective talent is a key priority. To become effective at building change and value creation, procurement managers will require a different set of requisite skills.

The need for developing capabilities that connect these thoughts has been echoed by several leading supply management CPO’s at major industrial companies interviewed in 2013 in my study on The Future of Procurement. Many of these executives emphasized the need for change, as well as the role of universities in helping to create procurement forums that provide specialized procurement skills in critical areas facing the modern procurement executive in the global oil and gas environment. With the increased volatility and change in this sector, a new set of capabilities is needed to embrace this complexity.

Several executives we spoke with identified the limitations with the current view of World Class Procurement as the penultimate application of standardized approaches across the business. There is a move away from procurement as a provider of cost, and much more of an emphasis on being able to deliver alternative forms of value to the business.

With this evolution, comes the recognition that procurement has many different faces and roles they are being asked to play – as legal experts, internal consultants, financial managers who can drive procurement value to a P&L, relationship managers, analytics and intelligence experts, and the like. In doing so, procurement organizations need to spend more time thinking internally about their business partners, as a critical part of the value equation. The business unit or individual who is on the receiving end of your supplier’s product or service, if they are not getting the basic level of performance that they need to get their job done, will not be happy. In such cases, procurement will never be seen a value-added function, ever.  Late deliveries, sub-standard quality, safety incidents, damaged shipments, and multiple other problems do not alleviate the benefits of a lower price, as many business unit leaders will tell you.

Many of these requirements need to be connected to an analytical platform, that ensures individuals use a fact-based, data-based approach to driving change and influencing stakeholders to build effective procurement strategies. In their paper “The Journey to Value”, IBM emphasizes that although the link between procurement performance and enterprise success is accepted, there is a not a clear linkage between the platform technologies developed to support procurement, and the cultural changes and leadership capabilities of procurement managers.   In particular, the need for technologies that drive sourcing analytics, risk management, supplier life cycle management, and market intelligence will become critical in building effective procurement transformation components – yet the linkage to these approaches is not well described or understood in the procurement community. Young early career professionals need to be mentored and introduced to the emerging needs of the procurement landscape, and be coached to be able to take on this new set of challenges.

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I had the opportunity to engage in a negotiation seminar with a large insurance company last week, and had the team work on a software contract role play.  In the scenario, there was both a buyer and supplier, and there were multiple facets to consider in the negotiation.  The problem in preparing for such a negotiation is that deriving a “should-cost” model in software contracts is extremely difficult – because often there is no cost-based model.  For example, the pricing models on cloud services can be very complex and buyers should be very careful to understand these different models.  Instead, the buying company should be aware of “hidden costs” to the contract, which often pop up unexpectedly once the contract is in full swing.

For that reason, it is more important than ever to include legal counsel (on both sides of the negotiation) when meeting to discuss software contracts.  Lawyers are exceptionally well trained to understand the subtleties involved in some of the contract language, and can offer potential challenges to what might term as “standard T’s and C’s”.  Their goal is not to get in the way – but indeed, to become more involved in the discussion and help avoid nasty surprises later in the relationship.  This may take more time upfront – but is generally well worth the extra effort.  This is one of the reasons why the Poole College of Management offers a joint JD/MBA degree in partnership with Campbell University.  The alignment of legal, contracting, and relationship management will become an important element for enterprises to apply in the challenging world of software that dominates so much of our technology landscape.

Some of the big issues where both parties should be careful were suggested by my colleague Don Klock, who has negotiated plenty of these agreements during his time at Colgate-Palmolive!

  1. Warranties should be tied to a very detailed description and have some sort of acceptance test before agreeing to accept it.
  2. Milestones: In order to gain financial leverage, it is important to spread out the milestones as far as possible and be very explicit how the buying companies is going to release those payments.
  3. IP is always one of the most difficult issues to negotiate. One could argue that the client is co-developing the software therefore at a minimum should have co-IP rights.
  4. Data Security and Rights. At a bare minimum, the client owns their data and can get it back in a timely fashion.
  5. What are the key metrics that are going to determine success? For example, uptime and response time, just to name a few. How often are we going to review them?
  6. If a software project seems very important to both parties, perhaps there needs to be a Senior Management Steering Group (joint buying company and software supplier management) to ensure that issues are getting resolved. For example, there are often communication issues that are not getting resolved in a timely manner. Many times, just having a group to meet when problems arise can prevent the type of communication problems that may arise at an operational level.
  7. Software providers often make huge margins in the Maintaince Fees. These fees need to be negotiated and at least capped at X%/year by the buyer.
  8. For Consulting Services that are part of the deal, it is important to assign a Key Person. Ideally you want to find someone who has a documented track record of successful integration and implementation to advise on strategies to employ in deriving the benefits from the software.   This person should be a member of the Steering Group.
  9. Large software development project agreements work lend themselves to a multi-year partnership agreement, However, it must have a excellent Exit Clause where the buyer can transition out of the agreement in a timely manner, get their data back, and have proper access to a useable escrow code (which should be negotiated as part of the deal, along with the cost).  If the buying company does have to exit, they may want to own those co-IP rights to use with the next supplier.
  10. Lastly one needs to think about how to handle/prevent cyber attacks and potential loss of data.

Software contracts need good lawyers to help with all of these points!  For a very good paper on pricing models and challenges in cloud services, see the following white paper.

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A new face of procurement is emerging which is recognizing that a new set of value drivers must be developed in the face of massive environmental changes. Some of the emerging views on the “future of procurement” focus on the importance of being a strong internal consultant, the importance of building relationships, coaching suppliers, post-award contract management, and relational contracting. These topics are emerging in the context of the new view that procurement is about building value for the enterprise.

It is against this context that the two books in this review represent two anchors that exist in the procurement environment, both the old, traditional model of power-based, “red meat eating buyers, and that of the procurement professional focused on driving relationship contracting and vested value to create mutual benefit for both parties. Each book represents a different perspective, and thus provide a representation of the current debate going on in procurement strategy meetings around the globe.

Andrew Cox’s new book “Sourcing Portfolio Analysis” represents the more traditional “power-based” view of procurement. The book relies on a series of prescriptive two by two matrices, that are further segmented into eight by eight matrices, that establish different typologies for supplier segmentation,. The application of these frameworks to the universe of buyer-seller relationships I proposed (ostensibly) to lead to improved sourcing outcomes…for the buyer! The book clearly views the supplier as a party that must be beaten down through the application of power-based negotiation, the assumption being that buyers have been exploited by suppliers for years, and the tables have now turned.

This work builds on much of the prior strategic positions concepts introduced by Michael Porter’s Five Forces analysis in his book Competitive Strategy (1980), as well as Peter Kraljic’s “Segmentation Matrix” published in the Harvard Business Review (1983), as well as Professor Cox’s own articles, working papers, and book chapters (which consume 3 pages of the reference section of the book). Unfortunately, the most up-to-date reference apart from his own that are cited are from 2008, and it is clear that there is a major gap in Cox’s use of more modern research paradigms that are related to relational contracting and negotiation. In fact, the subtitle for the book, “Power Positioning Tools for Category Management and Strategic Sourcing” gives it all away. This book is essentially depicts how buyers can leverage their market positions to gain more power over suppliers in negotiating contracts. But in doing so, Cox has taken the tools of Porter and Kraljic, and put them on steroids, without adding any significant insights that help the reader better understand how to deliver value in supply chain relationships. The author spends the entire book focused on building even more detailed segmentation matrices within segmentation matrices to define different types of sourcing environments. This results in several new terms that he is able to try to segment into relationship typologies. This results in a variety of different typologies that are not only completely confusing, but indeed meaningless! Take, for example, this one:

Reciprocal – Supplier Development + Supply Chain Sourcing: Full lean / agile / agilean supplier collaboration at the first tier + arm’s-length sourcing from within the supply chain, in which neither party maximizes their share of value.

Or another good one:

Buyer Dominant – Supplier Development + Partial Supply Chain Management: full lean/agile/agilean supplier collaboration at the first tier + information-based collaboration only within the supply chain, in which the buyer maximizes their share of value from all suppliers in the chain.

A good example of this type of relationship would be……what exactly? These buzz-words might be heard from a supply chain consultant who has had too much coffee at breakfast! But without a strong set of definitions, a practical set of examples, and a reference to more recent academic research, these descriptions are both confusing and meaningless at the same time. I expect more from Professor Cox, who has a lengthy set of publications in refereed journals.

What bothers me about this book is that it is entirely focused on power, and how a buyer can reduce their dependence on suppliers, and therefore “receive better value for money deals”. The notion that dependence may not be a bad thing, so long as it is governed through effective contractual mechanisms, performance measurements, open exchange of information, and mutual benefits is entirely lacking.   While I am in agreement that driving competition in any type of supply chain relationship is a good thing, it can involve increasing dependence through long-term mutually beneficial relationships. For example, my experience with Honda is that they often seek to build “supplier for life” relationships, that are focused on robust should-cost models, target costing, supplier development, and continuous improvement strategies in collaboration with suppliers. In another industry, oil and gas, I have witnessed supplier relationships that span ten years or more that are based on complete open books cost plus strategies that seek to drive demand management and improvement strategies. These types of relationships do not exist in the world of Cox’s Sourcing Portfolio Analysis. But then again, not everything can be simply labeled in a two by two matrix.

Unfortunately, the typologies identified here fail to provide even a single set of practical examples or cases that define exactly what is meant. And that is a telling problem with this book – these are theoretical models that have worked well, but which cannot be readily identified in practice. Perhaps this may be due to the fact that Professor Cox has had engagements primarily with organizations that are already in a position of power. His work was used for a long time in the 1990’s within IBM, a large buying company, which was known primarily for implementing Cox’s ideas around leveraging spend and driving to touch-less procurement technologies that minimized face to face contact with suppliers.   Cox’s work has historically focused on an environment in which procurement is embedded in large and powerful buying organization, procuring an uncomplicated product or service from an acquiescent supply base.

Interestingly enough, it seems even large behemoths like IBM have also turned the corner on this antiquated view of procurement. I remember years ago at an IACCM conference seeing the senior director of procurement answer a question “how do you define strategic supplier relationships?” with the response “if they do a lot of business with IBM.” However, the most recent 2013 IBM Chief Procurement Officer study published by the IBM Institute for Business Value found quite a different result. They found for instance that companies with high performing procurement organizations have higher profit margins and had the three following common attributes: 1) They focus on improving enterprise success, not just procurement performance, 2) They engage with stakeholders to understand and anticipate their needs and values, and 3) They embrace progressive procurement practices and tools to drive results. These role models are also more likely to collaborate with suppliers to develop new technologies, that emphasize brokering new relationships with suppliers to introduce new ideas and innovative thinking.

These components are entirely missing from this book, as the ecosystem depicted in the Cox book is far too simplistic to capture the realities of the complex world that procurement professionals are faced with today. It assumes that buyers control their environment, and that price is the primary driver of value. And this simply is no longer the case, as IBM itself points out in their study.

If Cox’s book is anchored in the past, then the new book by Keith, Vitasek, Manrodt and Kling is completely focused on the future. This book is a remarkable contrast, in that it adopts a diametrically opposite view to the notion that power is the basis for buyer-seller relationships. In fact, the introduction of the book begins by acknowledging the contribution that Porter, Kraljic, and the firm A.T Kearney (who espoused the term “strategic sourcing” to focus on leveraging volume to reduce price). But then the authors go on to note that their time has passed, and a new approach is needed for proactive procurement strategies to emerge:

No one would debate that these pioneers have led an evolution in procurement that made a lasting impact. But times have changed. Today’s environment is more dynamic and is filled with greater uncertainty. The tried and true tools and tactics adopted over the last 30 years as the gold standard are not as effective as they once were. Organizations that historically have won by leveraging their power or by strategically maneuvering to shift power in their favor find those strategies are losing effectiveness.

Specifically, the authors adopt the acronym VUCA to describe the current business environment, standing for volatility, uncertainty, complexity, and ambiguity. Procurement must approach sourcing decisions in this environment, with the knowledge that incremental changes will not do. In a VUCA environment, traditional static models of leveraging power no longer work. Procurement must earn the trust of the business to fully succeed, and in doing so, it must embrace a vision that goes far beyond the thinking of today, leveraging creativity and know-how to change not just the function from within, but the overall business value procurement can deliver.

The authors of the book set out to achieve this, in seeking to deliver on two key objectives: 1) to build awareness that reliance on conventional power and leverage approaches in sourcing relationships is limited, and 2) to invite procurement professionals to better understand the benefits of using relational contracting approaches through the use of Sourcing Business Models. Much of this work is grounded in the work by Kate Vitasek, the developer of the “Vested” model. Vested is a Sourcing Business Model in

which buyers and suppliers carefully craft highly collaborative relationships supported by true win-win economics. A win for buyers is a win for suppliers. Buyers and suppliers are vested in each other success.

The work is also highly grounded in the work of Oliver Williamson, the Nobel Prize winning author of transaction cost economics. This paradigm is one of the most highly cited models used in the sourcing research literature, and posits that buyer-seller relationships range from highly competitive marketplaces to establishing corporate hierarchies through insourcing. This work is used as the foundation to construct the seven Sourcing Busienss Models identified in the book. The authors also provide a Business Model Mapping Toolkit that provides step-by-step instructions for determining which Sourcing Business Model is most appropriate for your situation. Interestingly, the authors provide a link for readers to download all of the models through their vested outsourcing website, believing that use of the tools will propagate their use. In the remainder of the book the authors discuss other approaches that are required to fundamentally change the nature of the dialogue between buyers and seller, and the importance of building trust in relationships.

An important differentiator of their approach is the prominent discussion of the term relational contract, defined as a combination of written contract(s), interface protocols, and distinct social norms that enable a continuously efficient and effective commercial relationship. The relationship is efficient when the parties cooperate to minimize friction toward the commercial goals (i.e.,

when the transaction costs before and after the contract award are optimized). As the authors note, “the secret to make this happen is continual alignment of interests.”

The book is written in a format that is an easy read, without the use of buzz-words and plenty of examples and illustrations for the concepts. A number of case studies are written using unnamed individuals from the procurement world who have gone through different experiences and situations. I like this approach, as it provides a real-world feel and also emphasizes the importance of individual personality and capabilities and mindset as a critical ingredient of buyer-seller relationships. These cases also clearly explain the aftermath that occurs after a “meat eating buyer” has gone through and beat up a supplier. This often involves serious lapses in supplier performance, or post-contract markups and engineering change notices that wind up costing even more money than the supposed cost savings that occurred in the contracting stage. The alternative involves Trust, choosing to be open, transparent and credible. The benefits of opening up relationships that could not occur otherwise are illustrated again and again throughout the book.

I also liked how the authors draw on a historical perspective of the sourcing function, including a description of the now-famous destruction of relational capital achieved by the “procurement pitbull” Dr. Ignacio Lopez. There are also references to other visionaries in the procurement world such as Gene Richter and Thomas Stallkamp.

In contrasting the two approaches, a comment from a former IBM procurement senior executive who helped me with my review is useful to consider:

Overall procurement strategy development does need to continue to evolve. While I understand the notion behind VUCA, and there are certainly ever-present variables, I do not see these conditions necessarily being present 24/7 in the majority of commodities/relationships in which I have participated. Similarly, I do not see these elements as necessarily providing guidance as to how to build a supply chain team nor a supplier strategy. I tend to focus and tailor the solution to the operational variables of our business, the inherent flexibility of the products and processes to react to change, and the level of dependence on suppliers for technology, innovation, and risk mitigation. “Power” and “Leverage” are the results of the strategy, not the starting points.  Conversely, the idea that ‘spend’ is not an inherent lever in driving the best financial results is equally mis-guided (IMHO).

In developing and deploying procurements true value proposition to the business, everything in these two books have something to add. However procurement transformation, lessons from the past and classic maturity model thinking must be put in context. Modest changes in capability and thinking can help but will not bring the value modern business demands. There is also an emerging need for technologies that drive sourcing analytics, risk management, supplier life cycle management, and market intelligence will become critical in building effective procurement transformation components – yet the linkage to these approaches is not well described or understood in the procurement community. Procurement must progress and as George Bernard Shaw put it so eloquently “Progress is impossible without change, and those who cannot change their minds cannot change anything”.

 

 

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Against the many new articles and books being produced on the changing face of procurement and the importance of value creation and collaboration, Andrew Cox’s new book “Sourcing Portfolio Analysis” came out earlier this year. The book is essentially a series of prescriptive 2 X 2 and 8 X 8 matrices that establish different typologies for supplier segmentation, that ostensibly can lead to improved sourcing outcomes. This work builds on much of the prior strategic positions concepts introduced by Michael Porter’s Five Forces analysis in his book Competitive Strategy (1980), as well as Peter Kraljic’s “Segmentation Matrix” published in the Harvard Business Review (1983), as well as Professor Cox’s own articles, working papers, and book chapters (which consume 3 pages of the reference section of the book). Unfortunately, the most up-to-date reference apart from his own that are cited are from 2008, and it is clear that there is a major gap in Cox’s use of more modern research paradigms that are related to relational contracting and negotiation. In fact, the subtitle for the book, “Power Positioning Tools for Category Management and Strategic Sourcing” gives it all away. This book is essentially about how to gain more power over suppliers in negotiating contracts. Cox has taken the tools of Porter and Kraljic, and put them on steroids. The author spends the entire book focused on building even more detailed segmentation matrices within segmentation matrices to define different types of sourcing environments. This results in several new terms that he is able to try to segment into relationship typologies. This results in a variety of different typologies that are not only completely confusing, but indeed meaningless! Take, for example, this one:

Reciprocal – Supplier Development + Supply Chain Sourcing: Full lean / agile / agilean supplier collaboration at the first tier + arm’s-length sourcing from within the supply chain, in which neither party maximizes their share of value.

Or another good one:

Buyer Dominant – Supplier Development + Partial Supply Chain Management: full lean/agile/agilean supplier collaboration at the first tier + information-based collaboration only within the supply chain, in which the buyer maximizes their share of value from all suppliers in the chain.

A good example of this type of relationship would be……????   This is the type of mumbo-jumbo you might hear from a newly minted supply chain consultant who has had too much coffee at breakfast!

What bothers me about this book is that it is entirely focused on power, and how a buyer can reduce their dependence on suppliers, and therefore “receive better value for money deals”. The notion that dependence may not be a bad thing, so long as it is goverened through effective contractual mechanisms, performance measurements, open exchange of information, and mutual benefits is entirely lacking from the context of relationships developed by Cox.   While I am in agreement that driving competition in any type of supply chain relationship is a good thing, it can involve increasing dependence through long-term mutually beneficial relationships. For example, my experience with Honda is that they often seek to build “supplier for life” relationships, that are focused on robust should-cost models, target costing, supplier development, and continuous improvement strategies in collaboration with suppliers. In another industry, oil and gas, I have witnessed supplier relationships that span ten years or more that are based on complete open books cost plus strategies that seek to drive demand management and improvement strategies. These types of relationships do not exist in the world of Cox’s two by two Sourcing Portfolio matrices.

Unfortunately, the typologies identified here fail to provide even a single set of practical examples or cases that define exactly what is meant. And that is a telling problem with this book – these are theoretical models that have worked well, but which cannot be readily identified in practice. Perhaps this may be due to the fact that Professor Cox has had engagements primarily with organizations that are already in a position of power. His work was used for a long time within IBM, a large buyer, and which was known primarily for its ability to leverage spend and drive touchless procurement technologies.   A great deal of focus and writing on procurement has been on the relatively simple context of a large and powerful buying organisation, procuring an uncomplicated product or service from an acquiescent supplier. But the world is not limited to IBM and 2 by 2 categorizations.

 

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I visited Calgary, Alberta this week, and found it to be an odd environment indeed! Oil has leveled off at $60/bbl, major companies have all gone through major budget cuts, have cut headcount and released hundreds of supply chain managers and others to reduce payroll. At the same time, a drive through the streets of Calgary is held up by construction projects at every corner, even though office space downtown is at 11% vacancy, and predicted to reach 17% by the end of the year. This odd combination of headcount reduction in supply chain people (the very people who are most able to drive cost reductions in the supply chain) combined with expansionary economic activities appears very contradictory. To make it even more interesting, the New Democratic Party (a socialist platform) was elected into Alberta’s provincial leadership, and is on the verge of increasing the royalties paid by oil and gas companies to the province, to fund their increased spending on social programs (not to mention the minimum wage to $15).  (How is that going to help in this environment?)

This was the bizarre setting in which I had the opportunity to speak with a number of Chief Procurement and Supply Chain Officers at a number of large oil and gas companies in Calgary. I was interested in learning what they were doing in the face of the oil price challenges, and how they were planning to navigate the difficult times that lay ahead.   Several key themes emerged from the discussion.

First, procurement executives recognize that they are getting more attention than in the past, when oil was $100/bbl. This attention comes with a mandate and more responsibility to take cost out of the supply chain. Some of the organizations have responded by cutting headcount, which in fact may be counterintuitive, particularly if you are cutting procurement people who have the potential to be able to cut major costs in the supply chain! However, some are responding by beefing up their supply chain organizations, recognizing this as a major opportunity to drive change given an executive-level mandate to bring stakeholders in and make them accountable and part of the team.

Second, the theme of using the downturn as an opportunity for change recognizes that there is a need for a new approach to contracting and engaging suppleirs. As one executive noted, “we have gone through and asked for the one time cost savings of 20% – but I know you can only do that once. The real savings are going to occur as we work with suppliers and connect them to our engineering stakeholders, and jointly identify opportunities to take out cost.” Another noted that “Rushing schedules and rushing through contract development is a big part of why we are in the mess we are in. We need to go back and re-think how we write contracts, and who we are writing them with.”

Third, the timing of this emphasizes the shortage of good people. Note that the issue is not people…it is about the RIGHT people. One executive noted that “If I ask my teams to show me their category strategy, and how they are going to manage the top 3 to 5 suppliers in their category, I get nothing. I don’t even know if I can trust the spend numbers they are giving me, because I know there is a lot of leakage going on.” Another noted that “We don’t put the best people into our supply chain organization, as we have convinced ourselves that we are “different” from other industries.” Ray Floyd wrote a book called “Liquid Lean”, where he points out how energy companies need to really re-think this approach, and how they can most certainly apply lean thinking to supply chain and operational problems. One promising approach involves trying to standardize designs for many of our capital projects, to drive to “off the shelf” parts for many of our major Fort McMurray oil sands capital projects. One executive even noted that they were thinking of patenting some of their engineering designs, not so they could become proprietary, but indeed to be able to share them with all of the major oil and gas companies, that would then make them the industry standard and drive down cost while increasing availability and reducing cycle time!

It is these types of controversial but innovative types of activities that will help the industry deal with the new reality of $50 oil. The shale revolution is here to stay – and so people in the Canadian oil industry need to think about the new reality they are in.

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I had the opportunity to visit with the American Red Cross in Charlotte, NC yesterday, and held a negotiation workshop with the supply chain directors and managers.  This was at the request of my good friend, Tom Nash, who I have known since 2000, when he was an IT Sourcing executive at Shell Oil in Houston.  Since leaving Shell, Tom has had the opportunity to work in a number of different environments, including Cendant (the owner of the travel site Orbitz), Ministry Health Care, Premier Health Care, and now the Red Cross.  At every place, he has landed, he has been a strong supporter of the Supply Chain Resource Cooperative, and his engagement at the ARC was no different.  We are proud to be working with the Red Cross, and look forward to kicking off a set of student projects their supply chain team this coming fall.

The Red Cross is a 150 year old company, and their symbol is perhaps one of the most recognized brands in the world.  The Red Cross not only collects and distributes blood, but is also responsible for emergency and disaster response, and has to build a responsive supply chain that can react quickly to unexpected events. One would think that with the importance of blood distribution being at the core of their business, that a strongly centralized supply chain organization would be natural.  Guess again!  Up until five years ago, there was no formal centralization supply chain entity at the Red Cross.  Enter Jill Bossi, another one of my former colleagues, who came in from the Bank of America.  Jill was able to do some good things, building a centralized group that became the foundation for transformation.  She was also able to establish inventory strategies for five large distribution centers that form the neural network for the entity’s emergency operations.   Several new people were brought into supply chain roles who had strong backgrounds in planning, but the organization struggled with having to centralize a massive array of fleet providers, a fragmented and set of diverse equipment suppliers, and a somewhat uncertain governance structure.

Enter Tom Nash, who has been there only 2 months.  Tom came in to the new role as the Chief Supply Chain Officer, reporting directly to the CFO.  As noted in my previous blogs, he is a firm believer in the “Influence Model”.  The Influence Model, also known as the Cohen-Bradford Influence Model, was created by Allen R. Cohen and David L. Bradford, both leadership experts and distinguished professors. The model was originally published in their 2005 book, “Influence Without Authority.”  Cohen and Bradford believe that authority can be problematic. It doesn’t always guarantee that you’ll get support and commitment from those around you; and it can create fear, and motivate people to act for the wrong reasons. This is why it’s so useful to learn how to influence others without using authority.  Ultimately, the Influence Model is based on the law of reciprocity – the belief that all of the positive and negative things we do for (or to) others will be paid back over time.

In Tom’s short time that he has been at ARC, he has already helped to make the influence model a core part of the sourcing team culture.  In discussions with the managers yesterday, we emphasized how influence will need to be a core part of the changes to their sourcing agreements.  One of the teams discussed how this model had been used in negotiating a large HR system contract two weeks ago.  The team spent about two weeks preparing and explaining the market situation to key stakeholders, who together (led by procurement) developed the sourcing and negotiation strategy for engaging the supplier.  The VP of Human Resources was brought in, and her role in supporting procurement’s contracting strategy was explained.  After buying into the strategy, she opened up the session with the supplier, to show her support for the approach, resulting in a successful negotiation outcome.

The Red Cross still has a lot of work to do to transform their supply chain, but I am certain that the Influence Model will continue to play a large role in how this rolls out!

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I am delighted to share with readers of my blog the announcement of a new report completed by Jay Golden from Duke University and myself, that was released today at 11 AM and announced by Tom Vilsack, Secretary of the Department of Agriculture.  The report, the BioPreferred Program’s Report to Congress, “An Economic Impact Analysis of the U.S. Bioproducts Industry,” is the first to examine and quantify the effect of the U.S. biobased products industry from an economic and employment perspective. We’re sending this email to you as a courtesy because your organization is featured or referenced in the report, or members of our study team interviewed you in its development. In summary: The full study (including an executive summary) may be found on the BioPreferred web site.

Agriculture Secretary Tom Vilsack today announced the release of the report that shows the U.S. biobased industry is generating substantial economic activity and American jobs. He also announced changes under the 2014 Farm Bill that will create additional opportunities for growth in renewable plant-based materials, supporting the Obama Administration’s efforts to develop a new, rural economy and promote creation of sustainable jobs.

“This report is the first to examine and quantify the effect of the U.S. biobased products industry from an economics and jobs perspective. Before, we could only speculate at the incredible economic impact of the biobased products industry. Now, we know that in 2013 alone, America’s biobased industry contributed four million jobs and $369 billion to our economy,” Vilsack said. “Today, we are also adding to the number of innovative products carrying USDA’s BioPreferred® label and expanding options for our nation’s biorefineries. This means small businesses and global companies alike can continue to harness the power of America’s farms and forests to create new and innovative biobased products that are used all around the world.”

According to the Economic Impact of the Biobased Product Industry report, each job in the biobased products industry is responsible for generating 1.64 jobs in other sectors of the economy. In 2013, 1.5 million jobs directly supported the biobased product industry, resulting in 1.1 million indirect jobs in related industries, and another 1.4 million induced jobs produced from the purchase of goods and services generated by the direct and indirect jobs.

The report builds on the ” Why Biobased?” report released by the USDA in October 2014 (that Jay and I also worked on last summer). Estimates are that the use of biobased products currently displaces about 300 million gallons of petroleum per year – equivalent to taking 200,000 cars off the road.

The Secretary also announced changes to include new forest products in the BioPreferred program, along with proposed changes to the former Biorefinery Assistance Program to assist in the development of cutting-edge technologies for advanced biofuels, renewable chemicals, and biobased product manufacturing.

The final BioPreferred® program rules will no longer exclude mature market products (those that had a significant market share prior to 1972), providing consumers with more innovative wood products and other materials carrying USDA BioPreferred® label. Forest products that meet biobased content requirements, notwithstanding the market share the product holds, the age of the product, or whether the market for the product is new or emerging, also now meet the definition of “biobased product.”

The Secretary also said today that USDA is making improvements to its Biorefinery Assistance Program (Section 9003). The program, which was renamed as the Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program as part of the program’s Farm Bill reauthorization, provides loan guarantees of up to $250 million for the construction and retrofitting of commercial scale biorefineries and biobased product manufacturing facilities. In a rule that will be published in the Federal Register next week, biorefineries that receive funding are allowed to produce more renewable chemicals and other biobased products, and not primarily advanced biofuels. Also, biobased product manufacturing facilities would be eligible to convert renewable chemicals and other biobased outputs of biorefineries into “end-user” products. The new regulations also implement a streamlined application process.

Created by the 2002 Farm Bill and reauthorized and expanded as part of the 2014 Farm Bill, the USDA BioPreferred program’s purpose is to spur economic development, create new jobs and provide new markets for farm commodities. The BioPreferred program commissioned the independent Economic Impact of the Biobased Product Industry report, which is primarily authored by Dr. Jay Golden, director of Duke University’s Center for Sustainability & Commerce, and Dr. Robert Handfield, Professor of Supply Chain Management at North Carolina State University’s Poole College of Management.

The report found that the seven major overarching sectors that represent the U.S. biobased products industry’s contribution to the U.S. economy are: agriculture and forestry, biorefining, biobased chemicals, enzymes, bioplastic bottles and packaging, forest products, and textiles.

The study also includes location quotients by state to show the impact of the industry on individual states. Seven case studies are presented from stakeholders such as The Coca-Cola Company and PlantBottle packaging, Patagonia and Ford.

Today’s announcement was made possible by the 2014 Farm Bill. The 2014 Farm Bill builds on historic economic gains in rural America over the past five years, while achieving meaningful reform and billions of dollars in savings for taxpayers. Since enactment, USDA has made significant progress to implement each provision of this critical legislation, including providing disaster relief to farmers and ranchers; strengthening risk management tools; expanding access to rural credit; funding critical research; establishing innovative public-private conservation partnerships; developing new markets for rural-made products; and investing in infrastructure, housing and community facilities to help improve quality of life.

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