SUPPLY CHAIN RESOURCE COOPERATIVE

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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A recent review by Peter Smith of my new book, “The Procurement Value Proposition”, co-authored with Gerard Chick, provides some solid support for the message Gerard and I were seeking to develop.  Peter Smith is a writer for the organization Spend Matters, which has spawned a UK division as well.  In his review, Peter calls our work “an impressive book”, with its key theme being “the message of value as the central proposition and driver for procurement activity, rather than cost savings or transactional execution.”  Indeed, this is a theme that I have emphasized in a number of my own blogs over the past few years.

Smith also notes that perhaps we are emphasizing skills that are beyond the ability of most people to deliver – that we are indeed creating the need for someone who is “Mr or Mrs. Impossible”.

I beg to disagree.  It is indeed a challenge to find people with all the right skills.  In fact, I have given several presentations on the Future of Procurement where I use the idea of “FutureBuy Man / FutureBuy Woman”, as an action figure or super hero who has all of the capabilities required to meet all of their stakeholders needs.  This is a challenge – but then again, as I have written in the past, purchasing is the most difficult job in the organization.  If we are not up to the task, and can’t bring the best talent into a role that has responsibility for over 50% of an organizations costs (in most modern enterprises), then perhaps the leadership team doesn’t have their priorities in the right place!

So how can organizations find and develop this new generation of superheroes?  In my mind, they need to invest in a talent management strategy, beginning by partnering with targeted universities to help shape and develop the people that they need to fulfill these roles.  In my most recent blog, I described the type of person that organizations such as Apple are seeking to find:  tech savvy, smart, humble, able to work on unstructured projects with challenging requirements, analytically oriented, and most of all, willing to learn and take on new problems!

My co-author Gerard Chick concurs.  He notes in the most recent Spend Matters blog that “The modern procurement skillset is changing and today’s procurement professionals need to be increasingly commercially aware. They also need strong quantitative fluency and be competent in developing and deriving solutions from datasets. The people with these skill sets may not work in your industry; hire them anyway!”

In a recent discussion with Gerard, he and I also noted that it is up to educational institutions to address this shortfall.  We need to be able to emphasize and develop curiousity in students, not just pushing the same old tired Harvard Business School cases on them, hoping they will develop intuition for solving problems.  As Gerard notes in his most recent blog, “Curious people are self-starters; they read and get a kick out of thinking. Curious people are good at solving difficult problems for their employers because they’re really solving them for themselves. However, despite its rising value, we are not very good at cultivating curiosity.”

“The education ‘systems’ are increasingly focused on preparing people for specific jobs. To teach someone to be an engineer or a lawyer, however, is not the same as teaching them to be a curious or innovative engineer or lawyer. Schools focus on preparing students for the world of work, rather than on inspiring them, and we end up with uninspired students and mediocre professionals.”

The way that people learn to deal with new and difficult challenges is by diving into them headfirst.  That is exactly what initiatives like the SCRC do, is bridging the world of industrial and service supply chains with the academic and learning environment.  People need to have the ability to explore, use new tools, and tackle new problems in a safe environment.  That is how learning takes place.  We need to be up to the challenge of creating the “impossibly talented” procurement professionals of the future.  Our organizations need people who are ready to take on the many challenges that exist in the procurement environment we face today.

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One of my recent students from last year, Gaurav Chhabra, just graduated this semester, and landed a job in Apple’s supply chain organization.  I had a chance to catch up with Guarav today, and we chatted briefly about his experience in the Jenkins MBA program, the role of the Supply Chain Resource Cooperative in helping to shape this experience through the projects he worked on while he was here, and the impact that this had in helping to shape his future career at Apple.  Gaurav’s story is also documented in the recent post in the NC State Poole College news page.

Gaurav shared with me that coming into the program, he came into the MBA program with eight years experience as an electronics engineer, but had worked most of his 8 years in the oil and gas sector.  On his first day in class, Gaurav expressed to me that he was really interested in getting into the high tech sector.  As part of the supply management class that all of our incoming MBA students take in the fall, I seek to expose students to a number of different tools, decision methods, analytical frameworks, and strategic alignment issues  related to supply management.  For example, we spend a lot of time initially discussing stakeholder engagement, and a big chunk of the class is also dedicated to supply market intelligence.  We have a business librarian come in and provide students with an incredible array of databases, library resources, Bloomberg terminal tools, and others that would normally cost millions of dollars to access for an external company.   Students learn how to use these resources in mapping out the supply market conditions that are instrumental in shaping category strategies.  Next, students perform a detailed supplier evaluation for a global sourcing case study, involving a high tech situation.  As part of this, they are exposed to concepts of total cost of ownership, “should-cost” modeling, and  utilizing price indices to track and benchmark supplier price quotes and RFQ’s.  Finally, students learn the importance of negotiation preparation and contract management, and participate in a web-based negotiation simulation.  All of this occurs in an in-class and external team based environment.  Guarav noted to me that “These tools and approaches  really helped me to understand the importance of working in teams to arrive at a solution.”

The most important part of the entire experience, however, is the project assignment.  Every student in the class is required to complete a project with one of our SCRC partner members, often utilizing one of the many tools (supplier scorecard, market intelligence, should-cost analysis) that they learn in class.  This is effectively a “real-time” case study – one that is not concocted to derive the “right answer” like so many case studies, but rather a living, breathing case study that involves real people, real data, and real deadlines!   Gaurav noted that “my experience on the project involved a supplier financial risk assessment, for sourcing in countries where financial ratios and information are not always readily available.  We had to come up with innovative solutions for evaluating financial risk – something that is an important factor in Apple’s supply chain.”

Gaurav talked about how the practicum project he worked on with Foodbuy also helped him understand how to leverage information flows to come up with ideas for supply chain redesign and performance measurement.  “I had never been exposed to information flows of the magnitude that Foodbuy was working with from their consumer base, and I learned a lot about how to manage information and create analytics that are meaningful for decision-making.”

The types of things that students in the SCM program learn can’t be gleaned from a simple textbook or Harvard Business School case study.  The SCRC serves as the bridge that brings together the world of supply management challenges into the classroom, enhancing the experience, creating value for our SCRC partners, and giving students the experience and insight they need to “hit the ground running”.  Guarav is emblematic of the type of student that comes our of the NC State Poole MBA supply chain program:  Smart, technically savvy, humble, and most importantly, always willing to learn.  Apple clearly recognized, after 12 rounds of interviews, that Gaurav was exactly what they needed….And we have a lot more students like Gaurav in the pipeline!

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I participated in the Diversity Alliance 4 Science event last week held in Newark, NJ.  For those of you who don’t know, this is a fantastic event held by most of the major life sciences companies, to encourage networking and open collaboration with a host of small, minority-owned, women-owned, and veteran-owned businesses.  Life Science companies have a commitment to increase the value of their minority spend, and all of the majors (GSK, Merck, Pfizer, Novartis, Amgen, BiogenIdec, Teva, Takeda, and others) were present and actively engaged with suppliers.  Networking sessions led to opportunities to bid on new business, as well as sharing of opportunities and challenges.

I helped to facilitate one of the workshops, called “Cash Flow for the Business:  Understanding Payment Terms for the Good, the Bad, and the Ugly, Supplier and Corporation.  The objective of the session was to identify and discuss key concepts which all suppliers and corporations should be aware of in the current business environment, and provide insights into the trends, challenges, and opportunities to overcome many of the different cash flow scenarios encountered by minority suppliers.

The workshop was also “played up” a little bit, by having a ‘Shark Tank’ theme.  As anyone who has watched the show knows, there is usually a panel of financial and business experts who are listening to a “pitch” by an entrepreneur, and critiquing him/her and offering advice.  In this case, the entrepreneur was Luke Twomey, Director of Finance, for Philosophy IB, a small diverse supplier from New Jersey.  The “sharks” in this case included Todd Bittiger, Senior Manager of Sourcing from Novartis, Thierry Cauche, Finance from Novartis, Jon Heuser and Len Dunleavy, from J.P. Morgan’s Supplier Finance Program and Global Trade and Loan Products, and Carmen West, form the Minority Business Development Agency, US Department of Commerce.

I opened up the panel by introducing the problem of supplier payments.  New suppliers, especially smaller ones that tend to be in the diverse supplier space, are often eager for new business, and when they encounter the typical leadtime on most “big pharma” supplier payments, which span 90-120 days, they are astonished.  However, they often don’t want to disclose their challenges in managing working capital under these conditions, as they are afraid of losing face and thus losing the business.  Buyers, on the other hand, are often completely unaware that there is a cash flow challenge associated with these long leadtimes on payments.  The workshop was intended to emphasize the importance of transparency, regular performance reviews, and open discussion of how to reduce supplier risk under these conditions.

Luke was the “entrepreneur” in this case, and emphasized that his consultants often didn’t want to potentially damage their client relationships by bringing up the long payment terms.  He also noted that financing solutions for operation were needed, but that such arrangements were not evident, and it was not clear where a supplier was supposed to go to explore these conditions.

The first “Shark,” Todd from Novartis, passed on the “typical” procurement managers’ response, which was generally unsympathetic to the supplier’s plight.  (Note this was a “role play”, and in no way reflects the typical response from Novartis on this position!)  In general, Todd emphasized that he had risk concerns with a supplier who balked at these payment terms, and that there was a possibility they might default on their obligations.  Further, he was also concerned that the commercial credit expense for commercial loans to cover working capital obligations might be passed on to the buying company in the form of higher prices and higher cost of operational rates.

Next, we heard from Thierry Cauche playing the “Finance Manager” role.  Thierry emphasized that big pharma companies struggled with their own long cash payment cycles from insurance companies and governments, and were merely passing on their own cash flow elements.  He emphasized that pharma companies were not in business to be a bank for suppliers, but acknowledged that poorly functioning Procure to pay systems might often cause delays if suppliers did not properly complete invoices, left out crucial information, and other transactional issues.

Next, Leonard and Jonathan from JP Morgan introduced the concept of Supply Chain Finance.  In effect, this was a program where a supplier would work off a program sponsored by a specific pharma company, and could get early payment less a small discount factor, leaving the payable with the bank.  The benefit was that the buyer would not be aware of this transaction, it is optional (on an invoice by invoice basis), and would not negatively impact the suppliers’ credit score.  The discount rate would be based on the buyers’ credit score, not the suppliers’, so it would be a very reasonable number.

Finally, Carmen pointed out that the MBD Agency at Commerce was actively encouraging major corporations to drive these types of supply chain financing programs, and to also promise to provide lower leadtimes on payment terms to suppliers.  This is recognized as a critical element to promoting supplier diversity in the United States.

There were, of course, some interesting questions and answers following the session, but it was clear that this is an important topic which affects many different suppliers in multiple industries.  One of the key takeaways is that suppliers should be “up-front” in discussing their payment term challenges with buyers, and that they need to be proactive in participating in buyer-sponsored financial programs by major lenders.  Buyers also need to be more forthright in educating suppliers and making them aware of programs such as the one that exists between Novartis and JP Morgan, and introduce suppliers to the right people to facilitate these arrangements.   In general, this is an issue we will continue to see as being a rich area for research going forward … there are no simple solutions!

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I had the opportunity to speak to a group of utility companies and many of their direct suppliers at the annual Utility Supply Management Association in Savannah, Georgia, on Monday.  This was a great opportunity to share insights from our recent research, on the subject of driving closer buyer-seller relationships , and the role of analytics.

There were a lot of people at the conference, including the Sourcing Interest Group with whom we have a partnership, as well as our friends from Duke Energy, SPX, PSEG, CenterPointe Energy, and others.  Many of the people at the conference had been going there for 20 years, which incidentally was the anniversary of this gathering today.

It was interesting speaking with people at lunch and in the breakouts as well.  It was clear from my discussions that many energy utilities are under pressure to drive down cost.  Many of the executives at the supplier (manufacturer) organizations noted how this was translating into a tendency for purchasing to focus almost exclusively on price, at the expense of reliability, durability, and in many cases quality, all of which translates into total cost of ownership.

For example, a supplier quality manager at a large public utility described it this way.  “I work in supplier quality, and am constantly  preaching to our purchasing people that we need to be thinking more about total cost.  As an example, we buy transformers, and have put incredible pressure on transformer suppliers such as ABB, Eaton, Alstom, and others.  As we continue to push them, they find ways to make the product less expensive.  Maybe they substitute materials, use less oil in the transformer, use a lower grade of aluminum or copper that costs less, and other ways to “value engineer” the product’s costs down.  But what we are finding is that when we take these down from the poles, that the new ones will last only 7 years, whereas the transformers we are taking down from poles that were built in the 70’s are 30 or 40 years old, and have withstood the test of time!  And we have done this to ourselves!  Because we are so focused on unit price out of the box, we have lost sight of the long-term costs of having to replace these every 7 years!”

One of the key elements of driving closer buyer-supplier relationships is the willingness to look at these types of issues, and to drive innovative solutions that define the measure of success.  Success needs to be defined in terms of OUTCOMES, not just price of the product or the lowest lump sum bid.  As such, organizations need a better way to evaluate all components of value, not just price.  In my presentation, I noted that RFP’s often included a space for suppliers to define new approaches or innovative solutions that were not specifically identified in the RFP or RFQ.  These approaches can often create new solutions that buyers haven’t always thought about using.  (Many buyers also admitted that RFP’s were often “cut and paste” from prior contracts, and did not always include new technology requirements!)  One supplier asked – “does anyone ever read these solutions proposed on RFP’s?”  Many people stood up and said “Absolutely!”  If suppliers are able to find new solutions that take out cost for buyers, and result in improved solutions, you’d have to be crazy to ignore them.  After all – it is their business and they know it better than anyone else – including buyers!

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