SUPPLY CHAIN RESOURCE COOPERATIVE

Today’s breaking Wall Street Journal article provides a great case study on the impacts of not properly managing contractual supplier relationships.

First consider the type of supply arrangement this represented.  This was an important and emerging new technology, one that would produce manufactured sapphire to cover the face of all of Apple’s new iphone products.  According to the WSJ, “GT made furnaces for producing sapphire…. GT told Apple in March of last year that it was developing a furnace that could produce a sapphire cylinder, known as a boule, weighing 578 pounds, more than twice as large as what were then the biggest boules. The larger boule would yield more screens, reducing costs….Apple offered to lend GT $578 million toward building 2,036 furnaces and operating a factory in Mesa, Ariz. Apple would buy and retrofit the factory for an additional $500 million and lease it to GT for $100 a year.”

This type of purchase, nearly half a billion dollars, and for a supplier that is unique with an emerging new technology, puts this category of sapphire squarely in the middle of the “strategic category” for the traditional “Kraljic” category portfolio matrix.  Based on traditional supply management pedagogy, strategic categories require a great deal of attention, information sharing, and joint collaboration to ensure that the right mutually beneficial outcomes occur.

The second part of this challenge is understanding what type of supplier Apple was dealing with.  According to the WSJ, “GT was intrigued, because the agreement would provide more consistent revenue than equipment orders. Moreover, GT’s business making equipment for solar cells had fallen on hard times. GT’s 2013 revenue was down 66% from two years earlier.”  In other words, GT was also a “high risk” supplier, in that they had indicators of having had previous financial problems and had made bad technology investments in the past….read on…

Mapped to a “supplier preference” matrix, this would indicate that GT was definitely viewing Apple as a preferred customer, and would fall into the “Develop” category, or a supplier that is not doing a lot of business with Apple, but has the customer as a strong developmental prospect.  But because they were high risk, a prudent supply manager would want to watch them closely.

In terms of a procurement strategy, everything looked copacetic and had fallen into place.  GT’s stock price took off when Apple and GT signed an agreement to seal the deal.   Apple would lend GT $578 million toward building 2,036 furnaces and operating a factory in Mesa, Ariz. Apple would buy and retrofit the factory for an additional $500 million and lease it to GT for $100 a year.

Shortly after, in fact a few days later, the first sapphire boule came out of the furnaces, and it was badly cracked, and deemed unusable.  Soon, it became clear that the manufacturing problems were more than a single batch, and that there were major problems with the process itself.

At this stage, there should have been daily onsite meetings, so that Apple and the supplier could work on the technical issues together, and identify the source of the problems.  Instead, GT continued to flounder, hiring over 700 people for jobs that didn’t exist, as capacity was not up and running yet.  They struggled with quality, production planning, and failed to meet deadlines.  Rather than have regular communications, Apple failed to conduct due diligence and project planning.  GT, fearing that Apple would leave them stranded, continued to try to work through the problems on their own, and continued to experience difficulty.

This is a textbook case, in that it demonstrates the importance of managing strategic relationships through careful performance measurement, human interaction, joint problem solving, and project management.  It also demonstrates the critical nature of joint technology development.  Apple was essentially funding the project, but not providing the human capital and knowledge required to make the technology viable.  GT was afraid to ask for help, and preferred to clam up and continue to work on their own.   In the end, both parties failed to do what was needed to manage the relationship.   In the end, both parties failed to do what was needed to manage the relationship.

This doesn’t appear to be a one-time event either.  Another blog on the WSJ website interviewed Apple suppliers, and two key lessons came out of it:

“To long-time suppliers, GT is a reminder of two lessons they learned long ago: Don’t rely too heavily on Apple and don’t make promises you can’t keep. Follow these, they say, and you probably won’t end up like GT.”

“Apple always asks the suppliers to expand their manufacturing facility to meet the rush demand for its new product, but we have to make our own judgment as the big orders only last for a few months,” said a manager at an Apple supplier. “For example, Apple might want us to increase 100 production lines, but we would only add 50 to 60 gradually.”

The screen maker Wintek was another supplier that over-expanded on Apple hopes. The company expanded its facilities on the prospect of growth, but ended up losing new orders when Apple shifted to new technology to make screens thinner, people familiar with the matter said. The company has suffered major operating losses.  The subsequent word is out in the supplier community, that Apple is very demanding of their suppliers, but not always committed.

The blog also notes that “Apple has built up an army of supply chain managers over the past few years to squeeze costs, people familiar with the matter said. Many of these were hired directly from suppliers, so they know exactly where suppliers’ costs are. Apple’s contract manufacturers have seen their profits margins shrink as Apple flexes its muscle on component pricing, the people said. Apple has also tightened its oversight of factory conditions, which means higher costs for suppliers who have to comply with the measures.”

The approach to ruthlessly pursuing price reductions and using the marketing power is certainly one that traditional procurement executives have used for years, but one which everyone in the industry is recognizing as obsolete.  And the results are also predictable.  On October 6, GT chief Mr. Gutierrez told Apple that his company had sought bankruptcy protection.  GT shares collapsed 93% on the news, wiping out roughly $1.4 billion in market value. The story demonstrates why simply “checking the boxes” on sourcing strategies aren’t enough;  people actually need to manage and communicate with their suppliers, especially the important strategic ones.

 

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I was in Houston yesterday evening, speaking to a large group of procurement executives at a roundtable held by KPMG’s Procurement Advisory Group, at the fabulous Brennan’s restaurant on Smith Street.  The event was sponsored by Coupa, one of the leading providers of software, and several of the Coupa executives from the Houston area and from California were present.  The event was well attended, with over 40 executives present.  I had an opportunity to speak with a  number of executives from various organizations, including the Port of Houston, El Paso Exploration, Baylor College of Medicine, Pioneer Natural Resources, AXIP Energy Services, LyondellBasell Chemicals, and others.  Prior to the dinner, I also spoke with one of my former MBA students from NC State, Scott Frahm, who has been working at Bechtel for the last 10 years.

The atmosphere in Houston can best be described as “full throttle”.  Everywhere I drove in the city there was construction going on, including a massive re-construction of the Hobby Airport.  Business at the Port of Houston is robust, and the volume is growing, based on the hope that the Panama Canal expansion will drive more cargo into the port.   It seems as if the infrastructure is continuing to grow, based on the strong oil prices we’ve seen in the last few years. However, with the price of oil down in the $70′s, I did sense a bit of uneasiness in the air.  One of the opinions expressed (which I heard from several people) is that the Saudis are in effect hoping to drive out the “bottom feeders” in the industry, referring to the startups that have come out of the fracking craze.  The sense was that the strategy was to drive out competition by forcing oil prices to go lower, and putting these newer companies out of business.

Interestingly, the topic of my presentation was on Supplier Relationship Management, a research area that I have been working on with KPMG for the past year.  I shared insights derived from over 29 executive interviews, talking about the need for organizations to drive mutually beneficial contracts, to share risks and rewards, and to think on how to become more transparent and visible in their planning and actions, to derive greater value to stakeholders.  A big part of the ensuing discussion focused on the important of alignment within the organization, as too often organizations were known to say one thing to suppliers, and to act in a way that was completely opposite to agreed on working principals.

There was also a discussion about the challenges of accessing good data necessary for driving SRM initiatives forward.  One executive mentioned to me that “I came from the Sales side of the organization into procurement, and was used to working with CRM software that would provide me with all the information I needed to know about our customer segments, who were in them, how much business we were doing with them, the products and services and pricing structures we had in place, etc.  But when I came over to purchasing, and looked at the SRM technology that was available, I realized it wasn’t able to provide any of the information I need to have a conversation with my suppliers!”

This topic resonated strongly with me, as I had a conversation with Tim Cummins on Monday at the Zycus event in Amelia Island, and the same conversation with my student Scott Frahm earlier in the day.  In fact, the way that organizations manage relationships and contracting has to change, to keep up with the extremely volatile and complex environment we are faced in today’s global economy.  Procurement executives need to re-think how they establish performance metrics, how they evaluate and measure performance against these metrics, and find ways to resolve the inevitable conflicts when they occurred.  Although this sounds like a simplistic solution, my experience has been that companies don’t do this very well, either because they cannot align their internal stakeholders to this way of working, that they fail to properly define the scope of responsibilities during the contracting period, and they are unable to “sell the benefits” of this manner of working to their senior leadership. This is going to have to change.  The likelihood that oil is going to stick around $70 a barrel for some time is high (based on my quick survey of the room)…and I believe that this means thinking long-term, and not simply reverting to beating up on suppliers.  One executive pointed out that “Nobody cares about procurement when oil is at $100/bbl, but all of a sudden they are coming to me saying “we need to run everything through procurement because we have to cut back!””

This is exactly the root cause of the problem.  Procurement needs to re-think how they are selling SRM to executives inside the company, and how they think about effective relationally-based contracting to survive in a period of $70 oil and increased uncertainty on the horizon.

 

 

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As more data becomes available in the grocery and retail environment, organizations are re-thinking their supply chain processes to drive increased automation, improved performance, and increased inventory turns.  They are also re-thinking the design of their supply chains, thinking about how much of their product goes through distribution centers, distributed to stores, or shipped directly from suppliers  to store locations.

I recently completed a study for the International Institute of Analytics,   to provide insights into the following questions faced by retailers confronted with the issue of how to exploit analytics to improve supply chain performance.  In doing so, I had an opportunity to reconnect with two of my former students, Jeff Behrens, who is now a demand analyst at Lowes, and Kuru Subramanian (one of my first Research Associates I worked with at NC State!) who is now a consultant at Wipro, and who worked for years as a demand forecasting analyst at Tesco’s.  I also interviewed executives at Key Foods in New York, and P&G in Europe.

All of the companies we benchmarked have a different systems and analytics capability.  In general, all retail chains use a very simplistic approach, which generally consists of looking at prior year’s sales, and running historical promotions and coupon sales based on prior year.  Only recently have organizations gotten into complex solutions and tools to forecast grocery. Grocery is an inherently relatively stable category with little fluctuation in demand, except for major holidays.  In most cases, historical sales from the previous year for that week are used to place initial orders, and integrate with POS systems with manual weekly tracking of actual sales.

In general, I discovered some important insights in reviewing these systems:

  1. Forecasting in the retail sector is still a combination of human experience and analytical systems.  There is still some level of human review and scanning required to review/revise computer generated forecasts, due to the fickleness, weather-related, and changing tastes associated with consumer buying patterns in the grocery and retail channels.  Historical seasonal factors associated with holidays and events should be reviewed annually and planned for to optimize supply chain category plans in retail sectors.
  2. Data collected form Point of Sale systems can be compiled and consolidated into categories to detect consumers’ changing tastes and needs, with but should ideally be complemented with vendor insights and reviews to understand what factors may be at play in forecasts.
  3. Automated replenishment systems must be complemented by store-level management decisions for seasonal items, items with short shelf lives, and space planning factors that may impact product presentations and order quantities.
  4. Retail forecasting and replenishment systems continue to evolve, and are being complemented by third party consumer preference panel analytical services, as well as multi-tier collaborative planning systems.

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I was attending the Zycus Horizons 2014 conference at Amelia Island today, listening to speakers.  In addition to the procurement executives, I also got to meet Captain Dick Phillips, the captain of note in the film “Captain Phillips”.  We had a chance to talk about his experience, and he also presented to the group about the incredible experience he went through.  If you haven’t seen the movie or read the book, it is a great story in leadership.

In addition, I sat in on a set of interviews on the main stage.  Chris Sawchuck from the Hackett Group interviewed three heads of procurement from three large companies, and asked an important question.  Does procurement add to top line revenue.  In general, the executives noted that this was a measure that was nice to envision, but not a measure that they could believe in.  How do you possibly show what suppliers do that could impact revenue.  the response was somewhat lackluster….

“In general, there are restrictions.  Some issues are customer-driven, but can procurement really affect revenue in a way that is believable by the organization?  It will always be difficult to change that perception.” Based on that feedback, Chris asked a different question:  “Looking out to 2025 –will we be using the same KPI’s as we do today?  And if not – what will change?”

The first response, from Anders Lillevik, Global Head of Procurement Support Services, QBE North America, provided a very interesting perspective:

“I’ve been doing procurement for a long time, in many different companies.  And we follow a pattern: you do an assessment, a sourcing wave, build a process, and do it over and over.  Over time, you get decent at this cycle.  It is amazing that we do the same things.  We don’t impact COGS much in financial services – but from an indirect side – we will continue to build procurement but won’t build the level of influence as manufacturing.  But vendor management and KPI’s will be impacted – and we need to evolve beyond saving money.  If we define ourselves as a one trick pony – that is all we will be.  Branching into process reengineering and KPI’s will be important.   But what one measure will be involved in 2025?  I would love to see a measure of the number of crises averted by having better management.  The vendor defrauded you, went belly-up, they printed someone’s information on the front of the envelope!  How can we proactively NOT get into those situations.  It is good and bad – that is what makes procurement investment very visible – but not the kind of attention we want.

A second response was provided by Niklas Hamnstedt Chief Procurement Officer at TE Connectivity: “I would like to see a stronger rating of supply risk and a supply risk metric.  If I could punch a button that yesterday we were at 50 now at 45!  Also more end to end KPI’s – our own inventory – but don’t have supply chain lead-times on end to end.

Finally, a response by Alex Brown, Chief Procurement Officer at AMD: “Two new areas of focus.  I can see the light that will maybe be a freight train someday.  From a corporate margin, can we measure not just cost savings but how are they contributing to the gross margin of the company? Another one that is predominant in manufacturing is corporate responsibility, around conflict minerals and human rights.  People will measure you on how well you are managing your supply chain.”

These insights provide a clue as to the real underlying value that procurement brings beyond price savings.  But the real value is not yet being fully realized, and we are only starting on that journey.  But it requires leadership, and individuals who are willing to take on risks beyond the “usual” procurement model discussed by the speakers.

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“Luxury is a necessity that begins when necessity ends.”   – Coco Chanel

In this blog, I review the new book “Sustainable Luxury” by Gardetti and Torres.

Most people who buy a luxury product, whether it is a Gucci purse, an Armani suit, a Dolce & Gabana dress, or a pair of Ferragamo loafers, rarely stop to think about whether the product was made by a sustainable supply chain.  However, Gardetti and Torres take on this question, driven by a belief that the two concepts can in fact work together to create a better world. The authors met through email and came together in Buenos Aires in October 2010, leading to a productive set of discussions that culminated in the creation of the Center for Studies on Sustainable Luxury.  They have also created a set of awards in the IE Business School in Madrid, the IE Awards for Sustainability in the Premium and Luxury Sectors. This books brings together a series of thought pieces, empirical research studies, and theoretical arguments that provide a broad platform for thinking about sustainable luxury.  In the Introduction, the authors provide a definition of luxury shown in the introduction, and which goes on to provide other definitions focusing on luxury as a search for beauty, refinement, innovation, purity, the well-made, and the essence of things (Giron, 2012).  They then go on to point out that many luxury brands, especially Italian items, have relied on illegal immigration, slavery, and organized crime, providing an ironic twist to our view of luxury.  They introduced the Center for Studies on Sustainable Luxury as a counterpoint to these elements, with the aim of assisting companies in the luxury sector to transition towards sustainability. The remainder of the book is divided into three sections:

  1. Luxury, sustainability, fashion and value chain in textiles.
  2. Luxury, sustainability, and consumption
  3. Luxury and sustainability in relation to various topics and areas.

The authors in the book provide a number of viewpoints, beginning with an interesting chapter by Godart and Seong that questions whether sustainable fashion is even possible, given the many divergent goals of luxury fashion with sustainable principles.  Finn and Fraser analyze the “make do and mend’ practices from the 1940’s in the UK, and explore whether these principles could be applied to a luxury fashion world.

Similarly, an article by Holmsten-Carrizo and Mark-Hebert explore the ethical challenges of luxury production in the cotton supply chain and provide insights as to whether these methods can minimized undesired environmental and social effects. Other authors explore issues such as the fledgling “Made in San Francisco” clothing industry that is targeted at the luxury market, while others make arguments that sustainable consumption appeals related to subjective wellbeing and self-fulfillment.

Other topics include purchasing behavior of Brazilian and Portuguese luxury consumers and attitudes towards conscious consumption, and the relation of luxury purchasers awareness to sustainable issues. While the book presents a diverse set of perspectives, I found it difficult to find a cohesive theme linking the different chapters together.

Beyond the obvious themes of “sustainability is good”, and “luxury producers need to be more aware of sustainable impacts”, I also found that many of the arguments were biased against luxury producers, and I did not find many prescriptive models for dealing with the realities of the global supply chain, the pressures to drive out cost and improve quality, and the massive movement towards globalization that has driven luxury producers to these regions fo the world.  There was also a lack of models on how to evaluate and manage sustainability in the global supply chain, as I found many of the articles highly theoretical with few practical examples provided. On the other hand, I was fascinated by the nature of the arguments put forward.  For instance, the first article points out that the relationship between luxury and fashion is an ambiguous one, and luxury is timeless, but fashion is ephemeral, and while luxury is for self-reward, fashion is not (relationship to self).  These philosophical evaluations provide a very interesting set of guidelines for executives to consider when building corporate and ethical codes of conduct that underlie their mission and values.  These authors also point out that there are many limitations to sustainability that are inherent in luxury items and fashion, for instance the inflated production cycles associated with fashion prompts regular changes of clothes, and the emphasis on consumerism above sustainability is certainly questioned. There is an interesting case study comparing Ikea and Finlayson, two major companies, and their focus on sustainable sourcing.  Both companies have strong material health and utilization programs, and strive to improve social and environmental impacts in the conventional chain.  However, these are limited to cotton, and often rely on Fairtrade labels, which my own research has shown has severe limitations when it comes to actually promoting ethical farming programs.

The book is a good one for academics seeking to expand their research base to sustainable luxury, but I found it to be a bit dense for most executive readership, and low on practical solutions.   It is certainly an interesting read, and one that the fashion designers who drive this activity should read.

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I was recently interviewed by Jon Hansen on Blog Talk Radio, discussing my new book “The Procurement Value Proposition” co-authored with Gerard Chick.  In the interview, I discuss some of the major changes going on in the procurement area, and how we are at a crossroads for driving change.

Gerard added a great blog post to the discussion.  Part 1 was featured last week, and I’ve taken the liberty of adding the second part of the summary here.  Our book, The Procurement Value Proposition, will be released in December.  It has already gotten a great review on Buyer’s Meeting Point.  Here are Gerard Chick’s thoughts on what lies in stock for procurement in the coming decade…

Business intelligence is your key to the future:

  • Open pricing –pricing for goods and services will become virtually transparent due to the internet, e-sourcing, global trading networks, online communities, and procurement’s intrepid scrutiny into still-cloaked categories. Will negotiation become a lost art?
  • Risk recognition catches up –in this decade the moves to drive costs out and the consequential supply-related risk that activity has brought with it comes into sharper focus. We are beginning to see consensus develop around risk and complexity and how to model risk, as well as more standardised, readily available third-party information and networked communities where people pool data for operational risk assessment.
  • The emergence of Intelligent Data – procurement has spent the last three decades looking backward— at money spent or supplier performance in the past. The future procurement professionals will be working with information, data and models that look forward.
  • Knowledge at your finger -tips – full visibility regarding spend, risk, and performance, will be available when you need it. Ready access to accurate, timely, structured internal and external business intelligence will create unprecedented capability regarding information manipulation in support of decision making.

Collaboration is omnipotent:

  • Innovation from the supply base – Since the ‘90s the move from closed to open innovation models has facilitated innovation-oriented cost saving strategies. We now see a major emphasis on driving and taking innovation from the supply base with the supply management role to set it up and move on.
  • The dawn of the extended enterprise –manufacturing has led the “make –v- buy” paradigm for many years – creating as shallow depth of manufacture. Whilst the manufacturers intend to stay there, service organisations will join the outsourcing bun fight too. The expanding trend to extended enterprises promises interesting times for supply professionals in the very near future.
  • Solutions not products please– suppliers and service providers are taking on bigger chunks of things they already do for their customers by developing end-to-end solutions if they do not already exist. Where solutions do already exist, then customer enterprises must become much more receptive to sourcing them, with suppliers moving out of their comfort zones to drive customer performance.
  • How soon is now? –Life is all about timing; the unreachable becomes reachable, the unavailable become available, the unattainable, attainable. Customer-supplier collaboration will shift and whilst today, suppliers may be asked to contribute ideas to existing designs or to help fix existing processes soon they will be frequently in from the “get-go”.
  • Mi casa es su casa – as supply management professionals look to extract more value from their supplier relationships it stands to reason that in time leveraging supplier resources and integrating supplier functions 1-to-1 will become the norm.
  • Networks for innovation– a transition from the dyadic ‘buyer and supplier’ relationship to ‘integrated supplier networks’ will enable greater coordination of innovation roadmaps across connected businesses and industries. The dawn of sapient leadership?
  • Suppliers gain power – the growth of outsourcing, tighter integration, and heavier reliance upon supplier’s means that they are gaining more leverage in buyer-supplier relationships. Instead of them selling to you, it may be you selling to them – procurement has a new challenge… to remain attractive to key suppliers.
  • Organisations share risks and rewards – as supply management professionals get better at segmenting, defining, and measuring value, they will begin to incorporate both gain- and risk-sharing into commercial relationships with suppliers.
  • Motivational contracting – the dawn of the “intelligent client”. As well as sharing risks and rewards in contracts, supply management professionals will accept greater risk in commercial relationships with critical suppliers by leaving out all the de-motivational stuff that inhibits supplier innovation.

 Connect, network, trade:

  • Everything starts with an E! – Procure-to-pay, sourcing, contract management and other automated solutions will be integrated up and down supply chains, fully adopted, providing full transparency and real-time insight.
  • Work on your smartphone – A new internet-savvy and technically-confident generation is entering the workplace using smart phones, tablets, embedded chips, and other devices to create a mobile work environment for procurement professionals and suppliers alike. We are seeing it now; it will only get bigger and faster.
  • Connect and collaborate – For years we’ve been talking about dynamic supply chains and how networks are the way to go forward but actually manifesting that in our day-to-day, work-life has been difficult. Now, we have an opportunity where in 10 minutes we can find second and third-tier connections in global networks, with people who know people you know. Buyers and sellers will increasingly rely upon digital trading networks and communities that allow them to quickly and easily discover each other, connect, and collaborate.
  • It’s all about complexity – the fast-growing, and culturally different organisations developing in the emerging economies, makes the process of selecting suppliers more risky, couple this with the inherent complexity in a globalised market place, and it becomes clear that doing business is increasingly difficult.
  • Fragility and supply risk – converging global trends in often turbulent economies means that a new systemic approach to risk must be taken. The conventional approach to risk related to exposure to uncertainty and therefore uncertainty was the source of risk. However the uncertainty of the (global) economic environment cannot be controlled; these days, excessive complexity is the source of risk. We can anticipate big increases in companies’ awareness around supply risk and also an expansion in their perceptions of where risk lies.

Supply professional skill sets must change:

  • Procurement professionals need to get savvy – professional; influential; persuasive; visionary; strategic; global; collaborative; commercially savvy; these are the attributes of the future supply professional.
  • A new definition of ‘expert’ the new supply professionals must become “students of their industry”. They will know everything, from the science, economics, law and politics of their supply markets on a global scale.
  • The battle for Talent–where will we find future talent, how do we develop the talent pipeline? Is it too sparsely populated to meet the demand for the professionals described above how will we meet the challenges as they develop this decade? The upshot will doubtless be intense competition to attract the best and brightest and it will most likely be on their terms.

 

Supply side management is increasingly gaining control over its main purpose — the procurement of goods and services for the organisation – supply assurance.  Today and as we move into an uncertain future, procurement professionals clearly face a variety challenges. All organisations are rapidly investing in new technologies to meet these challenges in the contemporary, global marketplace; however the skills required to take full advantage of these tools and circumstances are often lacking.

As scrutiny of organisations’ environmental and ethical practices increases, there is also a requirement for procurement to understand the implications of its corporate responsibility and sustainability for purchasing and the supply chain. Efforts to make a bigger contribution to strategy continue, but sometimes at the cost of misunderstandings between the profession and the rest of the business. And yet procurement has much expertise to offer, which can provide substantial financial benefits. Convincing colleagues across the business of this, and aligning not just goals but thinking about where the profession can — and cannot — add value, is potentially the biggest challenge in the years ahead. Ultimately the only way to predict the future is by helping to shape it.

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I was recently interviewed by Jon Hansen on Blog Talk Radio, discussing my new book “The Procurement Value Proposition” co-authored with Gerard Chick.  In the interview, I discuss some of the major changes going on in the procurement area, and how we are at a crossroads for driving change.

Gerard added a great blog post to the discussion, which I’ve included below…Thanks Gerard.  The post was so interesting, I’ve decided to put it in several chunks – here is part 1.

The big business idea of the last 30 years has passed its sell-by date. The idea being that you drive cost out of the organisation to make it more profitable, to maximise shareholder value. Why has it passed its sell-by date? Because by driving cost out most businesses have been driving huge risk in. Why do organisations public and private, continue to get this so wrong, pursuing the will-o’-the-wisp of cost reduction with measures that end up increasing them? This preoccupation seems to have tainted the cream on the top of most business models.

With the shift in the economic centre of gravity to the east, has the competitive edge of western economies been irrevocably dulled? Have decades of outsourcing and downsizing drained our ability to innovate, grow and prosper; and if so then what can we do about it?

The last 30 or so years has shaped business models and the business landscape – globalisation coupled with rapid developments in the new information technologies are changing the way we live and work.

I believe that the evolution of supply side management has placed procurement at the strategic heart of many organisations and that some or all of what follows will become common place over the next decade or so as the sustainability of the organisation as an entity becomes paramount.

The supply function evolves:

  • The procurement function shrinks – as the strategic impact of procurement really comes to the fore, organisations will still care about managing their spending; they just won’t have a large, discrete, function doing it. Procurement has two types of people working in it – doers (the buyers) and enablers (the value adders). Enablers will be deemed more useful to the organisation and stay embedded in strategic business units.
  • Profits replace cost savings – yesterday’s cost savings focus, the eponymous “goalkeeper” mind-set, will give way to a strategically aligned emphasis on profitability. So will supply management still concentrate on cost savings or will contribution to revenue growth take over? How will you address the doer –v- enabler question?
  • Budget battles fade away – as the discrete procurement function moves into a new modus the battles to ensure that cost savings are reflected in their budgets will fade with their passing. The perennial emphasis on cost savings only will have less weight than security of supply – timeliness and quality.
  • Bye-bye to the “buyer”– those who excel at cutting deals in the back office will find themselves working for third-party services organisations — or maybe not at all! The enablers, value-adders will rule!
  • Embedded procurement – will the future bring a loose network or a tight function? One of supplier-facing professionals embedded into strategic business units, communities, and processes wherever needed, constantly moving and reinventing their roles as needs shift –how will the highly successful procurement leaders make this happen?

 

A new supply management mind-set emerges:

  • Outsourcing takes off- many current procurement and supply side activities, the ones that do not get pushed elsewhere in the organisation, will be outsourced as organisations rationalise and “slim down”.
  • Service providers call the shots - the quantity and quality of third-party procurement services will increase dramatically simply because their performance, in many spend categories, will surpass what can be achieved in house.
  • The strategic horizon widens- the past 30 years has seen procurement transform from tactical to strategic. But the notion of ‘strategic’ remains hemmed inside the function, almost a prisoner of its own history. With a cultured understanding of the (strategic) value-adding capability of procurement and a new generation of professionals – the bimodal procurement pro – the realisation of what strategic can mean gets much broader.
  • Procurement gets commercial – as well as managing the physical supply chains, procurement will also become more intimate with the workings of the financial supply chain, ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than simply reducing spend magnitude.

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Bob Trebilock, editor of the Supply Chain Management Review, sent me an interesting email today that poses an interesting set of questions.  Bob writes:

“A friend sent me an email today with a link to a column by Peter Morici, a well-known conservative economist and writer (you see him on Xerox commercials wearing a bow tie) titled:  Lift Vocational Education, not Minimum Wage, to Fight Inequality.

Morici argues that we don’t need to raise the minimum wage for those jobs that pay minimum wage – that’ll only create more unemployment because companies with low wage jobs will just automate rather than pay the higher wage. He uses the example of McDonald’s investigating automation technologies to replace workers in its restaurants. Instead, he argues that we should encourage and support vocational education that will train workers for higher paying jobs. Not to step into the match, but I write about warehouse and factory automation. DCs and plants have been automating for years to eliminate the number of higher paying jobs on the shop floor, and that ain’t going to change. But, that’s not my question.

Today’s NYT has an article about how fast food restaurants like McDonald’s and Burger King pay $20 an hour – a living wage – in Denmark. .

Here’s the sentences that caught my eye in the NYT article:

“In interviews, Danish employees of McDonald’s, Burger King and Starbucks said that even though Denmark had one of the world’s highest costs of living — about 30 percent higher than in the United States — their $20 wage made life affordable.

True, a Big Mac here costs more — $5.60, compared with $4.80 in the United States. But that is a price Danes are willing to pay. “We Danes accept that a burger is expensive, but we also know that working conditions and wages are decent when we eat that burger,” said Soren Kaj Andersen, a University of Copenhagen professor who specializes in labor issues.”

Bob asks an interesting question:  Is the notion of paying a higher wage – whether it’s $10 an hour, $15 an hour, or $20 an hour – a potential competitive advantage by a company touting what it does to lift domestic workers out of poverty?  Many companies today  use certifications and labeling to argue that they’re charging a higher price for coffee or tee shirts to benefit workers in Ethiopia or Bangledesh.  But could that same argument be used as a basis for lifting American workers out of poverty?

This is a compelling argument.  But it boils down to whether the American public will pay more for their burger knowing that it is helping someone make a living wage.  Some of the research we have done through the Center for Environmental Farming suggests that consumers SAY they will pay more for a locally grown product – but the empirical evidence doesn’t always support that..

Andrew Pederson, a co-author on a joint article soon to be published in SCMR who has a great deal of experience working in the fair labor space, provided his input:

“My short answer is yes, though I wouldn’t accept a dogmatic view either way.  Income is absolutely the most important factor in reducing poverty and improving living conditions generally, and both vocational education and higher minimum wages would likely contribute to higher incomes.  It’s also very tricky to measure, and the corporate “economic impact” campaigns I’ve worked on previously have been highly politicized and deeply suspected by journalists and the general public. So far, most consumers haven’t shifted their buying criteria very far from price, either because they cannot afford to do so or because the “externalities” now being priced back into some products are not important to them.  I would like to believe that the former is true, and that as greater production efficiency from automation and other technological innovations eliminates jobs we are quite literally unwilling to pay humans enough to do, the labor market will shift to more valuable skills that will increase incomes. As incomes increase, perhaps then a majority of consumers will be more able and willing to pay the more expensive prices that will drive lasting changes in sourcing and production.” 

My colleague Andreas Wieland (who is German) actually lives in Copenhagen Denmark, and added his two cents:

“Denmark is really expensive compared to Germany, where people mainly look at the price of products. Unlike in Berlin, where I could afford going to a restaurant almost everyday, this wouldn’t be possible here. However, the quality is also very high, as Danes like high quality. Meat is usually organic here. When you look at wages you also have to see that 20 euros in Denmark cannot be compared to 20 euros in North America, as the social system in Europe has, of course, quite a high standard and the wages are especially high in Denmark. What you can see here, too, is that Danes tend to buy a lot of organic and social-friendly products. This is, because of the higher standard of living than in the U.S., which makes such products affordable for almost everyone, but also because being eco-friendly is part of the Scandinavian culture. I also see less Danes buying in chains like H&M than in Germany or especially in the U.S. This also indicates that Danes like high quality and are mostly rich enough to afford it. I think it is part of the culture and culture changes slowly.”

Should we let the free market decide this debate?  Or is legislation required?  What do you think?  Feel free to post your thoughts…

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More and more global luxury brands such as Gucci, Louis Vuitton, and others are promoting themselves as Lifestyle brands, spanning many products including fragrance, home collections, apparel, paint, wallpaper, foods, and many other products.  In this environment, the supply chain and logistics task becomes even more complex, as it involves delivering and fulfilling product and service support to deliver a lifestyle “vision” around the world. Many of the Lifestyle brands are licensed across multiple geographies. In this environment, supply chains are not “pull”, but rather “push” in nature.    Designers decide on a life style concept, and plan on what they are going to sell – which is a PUSH based supply chain.  Such brands may ship small runs of five bags, gowns, or shoes that cost thousands of dollars, whereas typical apparel products are produced in volumes of hundreds of thousands going to low cost retailers.   In this environment, global luxury brands have to design their supply chain based on who they are today, and who they are trying to be based on the projection of their image to the public.

A pull-based supply chain is different – the system recognizes the demand trigger and reacts to it.  But for luxury brands, designers are making decisions TODAY about what people might be wearing in 15 months. Luxury brands are also not like “fast fashion companies” like Gap, Zara, H&M, and others – they buy fabric, throw it out, find out what sells, and make more of it!  Global luxury brands may produce a single product one time, and never produce it again….ever.  These products are sold as a “look” – that is to say, they include several different products that will arrive at a merchandise location at the same time, that fit together for an overall lifestyle design feel and aesthetic.  Delivery reliability is much more important than speed in this environment.

The nature of pricing and timing is critical for this industry. Designers are by their very nature fickle creatures who change their mind frequently, choosing new fabrics, new designs, new colors, and often challenging materials –  and that is what makes our supply chain difficult.  Affluent consumers are willing to pay for higher-margin merchandise, but only for a very short time.  They will pay a price that yields 70% gross margins, which converts to negative margins in 12 weeks.    A  fashion item loses value very quickly, and if not sold during a very short season won’t be worth anything a week later. The supply chain design is very much focused on contract manufacturing to a network of factories.  This is a challenging sourcing base, and global luxury brands must also pay attention to general labor and supply chain compliance policies. Designers will specify fabrics to contract apparel cut and sew operations – which requires alignment of networks.

Most of the luxury brands’ global supply chain manufacturing networks are in Asia, with the biggest location being China – which is becoming too expensive.  There has been a strong push for more US manufacturing in recent years.  The problem, of course, is that companies struggles to find individuals who are willing to work in apparel manufacturing plants. Another interesting observation is that many luxury brands ship to retailers at the end of the month, because big retailers such as Saks, Macy’s, Penny’s, and others are measured on “open to buy dollars” and “investment productivity”.  These retailers will snapshot their inventory productivity at the end of every month for the financial analysts…which means the brands must ship to these retailers at the end of our month….which are then received into inventory the very next day at the beginning of the next month, to ensure the measures look good.! The entire apparel supply chain is driven by these financial metrics.  A lot of the supply chain behaviors are driven by these financial measures, compensation systems, and bonuses are based on that metric.

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A recent report by Software Advice - a supply chain execution software reviews siteprovides insights into what a group of executives surveyed is looking for from supply chain job listings.Software Advice analyzed 200 job listings to find out what it really takes to be a supply chain manager.  Some of the highlights included the following.

  • On average, employers want a supply chain manager with 7 years of experience.  However, 40% are willing to look at new entrants that have less than 5 years of experience.  This means that students who are graduating and looking for a job should try to get at least a couple of summer’s worth of job experience, even if it is not directly job related.  For MBA students, internships are critical to finding a job!
  • 72% of job listings included a Bachelor’s degree requirement. 17% preferred candidates with an MBA. My experience is that some employers would prefer to find undergraduates for their open roles, and do some training themselves.  Others just want MBA’s.  So you need to do your homework if you are looking for a job!
  • 37% of employers wanted a supply chain manager with a professional certification. One third of employers specified an APICS certification.  Bottom line:  APICS certification is good, but working towards CSCMP or ISM certification can’t hurt either.
  • 45% of employers want undergrads with a SCM concentration – but 45% will also look for a general business degree.  25% are looking for engineers to work in SCM, and another 5% want Finance or Scientific degrees.  For example, to work in pharmaceutical industries, some companies will only look at students with a chemical engineering degree..
  • ERP or MRP experience is a plus in 40% of cases.  SAP is preferred followed by Oracle experience..
  • Hopefully you like to travel – 33% of employers say some travel is required.

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