SUPPLY CHAIN RESOURCE COOPERATIVE

In my new book “The Living Supply Chain” co-written with Tom Linton, we reflect on the new capabilities required to be able to work with the evolving imperative of real-time data.  Two key concepts reflect the core elements of real-time supply chains. Velocity is the ability of an organization to flow working capital rapidly from suppliers through end customers. Working capital is generally in the form of inventory, which is an asset that doesn’t produce any revenue or cash. Thus, the object of the real-time supply chain is to achieve velocity in every aspect of how companies run their business. Real-time data in the supply chain provides support to managers who make a number of important decisions, including the following:

  • Tracking and monitoring inventory;
  • Determine the volume and mix of product to schedule for delivery;
  • Scheduling incoming material and communicating with suppliers;
  • Establishing the time and modes of efficient, responsive transportation providers,
  • Planning and scheduling personnel in distribution and warehouse operations,
  • Establishing how to move product through global logistics systems,
  • Communicating instantaneously with personnel in alll roles across the supply chain (suppliers, distributors, customers), who must and make decisions related to unexpected events and disruptions that impact material flow.

The ability to respond to real-time data and derive supply chain performance improvements is closely linked to prior work in organizational information processing theory (OIPT). According to OIPT, an organization’s information processing capabilities must be aligned with its information needs. That is, an organization must be able to gather, interpret, synthesize, and coordinate information across the organization (Burns and Wholey, 1993). Processing information in such a structured and logical way reduces uncertainty and helps various decision makers develop a shared interpretation of the information (Daft and Lengel, 1986).

The opposite of visibility is opaqueness, or the absence of visibility on what is happening in an organization’s upstream and downstream networks. When individuals have visibility to events that enable decision-making velocity, minor problems and disruptions are resolved more quickly and easily before they escalate into bigger problems (Craighead et al., 2007). Examples of visibility include demand visibility, market visibility, and supply visibility.  Speed of decision-making increases not just the flow of information, but also the flow of materials, shipments, production, and all activities in the chain. A metaphor is that of reducing friction, which increases flow, where friction includes all of the typical delays and problems that slow material flows and increase inventory. Examples include the multiple layers of approvals for purchase orders, delays in decisions when a forecast deviation occurs, or the lack of response when a major disruption shuts down shipments to customers. Friction can produce bottlenecks in production systems and shipments, which delays material and causes inventory to build up or shortages to occur. Examples include the Tianjin explosion, the tsunami in Japan, and the port closure in Los Angeles.

These principles are not new. Many of the concepts around “lean production systems” have emphasized flow and visibility. For instance, some professionals maintain that demand information sharing and visibility enable improved supply chain responsiveness, alerting executives to opportunities and challenges in the extended supply chain.   But the emergence of real-time information that enables the instantaneous visibility of assets across multiple tiers in supply chains has only been realized in the last two years. Real-time data is enabled by the emergence of cloud computing and mobile devices, which creates “big data” technology platforms that process higher volumes of internal and external data from multiple sources.

Some organizations have invested in very expensive systems called “control towers” to manage their “big” data. In a control tower, information from all of an organization’s logistics systems, production facilities, inbound shipments, outbound shipments, and inventory levels are dumped into a massive data warehouse (Brooks, 2014). The information is then centralized into a “control tower”, where individuals are scanning what is going on, and senior executives render decisions, sometimes using complicated algorithms and automated ordering systems. The fundamental assumption behind control towers is that senior executives removed from the day-to-day have the best knowledge of how to optimize the entire supply chain, because they are the only ones who have access to all of the data. Much of the data is “integrated” (e.g., lumped together) from ERP systems, transportation management systems (TMS’s), warehouse management systems (WMS’s), distribution requirement systems (DRP;s) and material requirement planning systems (MRP’s). Because many of these systems are in a “batch mode, meaning they are updated on a weekly, or perhaps daily basis, the information being viewed in the control tower is always lagging. As a result, decision-makers in the control tower are making decisions based on what happened a few days ago, and are determining what to do next based on what they think will happen next. This scenario embodies the “old” themes of “supply chain integration”: batch processing, information updates, “control-tower” thinking where only some people see the information, and decisions made by the “top brass”.

This model, in my opinion is turned around.  Because only when people on the ground can see the data, collaborate with one another, and resolve their issues through virtual, mobile data reviews, can problems be resolved in a timely manner before they spin out of control.  Our review of the research literature reveals a dearth of information that describes how organizations are combining mobile computing and system-wide supply chain analytics to derive new emerging capabilities.  This phenomenon is so new (e.g. Flex installed its real-time Pulse Center in 2016) that it is clear that current managerial ways of thinking about real-time data have not caught up with the technological capabilities descending upon us!

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In industries that are going through a lot of Capital Expenditure investments, including construction of pipelines, LNG facilities, and mining operations, the role of procurement on the success of the organization is somewhat different.  The supply chain function impacts a company’s financial performance through improved operations in several areas of the business. Here are some of the areas where procurement has the opportunity to make an impact.

Capital Overruns

When goods and services are not available on time in projects, technical personnel, contractors and employees are not working. Yet the purchasing company continues to pay the bill for these non-productive hours.   The key contributing factor to these delivery failures is the poor or inadequate communication, planning, coordination and synchronization of supply chain logistic activities related to project requirements.   Another major contributing factor is the lack of understanding of supply constraints early in the projects planning. These constraints drive late changes in the project plan and design that cause delay and inefficient use of project resources.   Most projects try to compensate by increasing the volume of goods ordered. This approach does smooth some of the bumps but also leaves a mountain of surplus material to be disposed of at the end of the project. Integration of key suppliers early in the project and through the project combined with a disciplined focus on logistics excellence eliminates these inefficiencies.   In one company, application of these strategies in the exploration drilling area cut planning time in half, execution time by 20%, reduced overall costs by over 15% and increased the groups overall success rate. Application of these strategies in the supply and erection of structural steel provided cost savings of over 30%.

Cost of Goods

Supply chain management has a significant impact on the Cost of Goods Sold spend. Integration of suppliers into planning and work practice development allows companies to change or reduce the demand for expensive goods. Being a “Customer of Choice”, leveraging corporate spend in combination with the development of the supply chains ensures that buyers are paying a competitive price for the goods and services we purchase. Development of supply chains will further allow buyers to share with our suppliers in the cost reductions associated with the elimination of inefficiencies.

Asset Utilization

Asset utilization is a measure of how effectively a company utilizes assets in the execution of the capital asset construction project and afterwards, impacting Operating Expense. Supply chain development, logistics excellence and standard processes will ensure that we utilize supply chain assets such as inventory more effectively. It is expected that these strategies sustain a reduction in inventory levels by over 25%.

Cash to Cash

This metric assesses the responsiveness of supply chains to convert purchases into paid for customer requirements. Clearly all the supply chain strategies will affect the responsiveness of supply chains. This responsiveness will allow companies to improve efficiencies in our inventory management, warehouses, procurement and accounts payable transactions.

Return on Capital Employed

This metric is associated with commanding premium prices in an open market through production of the optimal equipment efficiency. Integration of the supply chain plans with the business unit plans ensures a company’s supply community is aligned to effectively reduce capital requirements, reduce variability, improve inventory turns and improve scheduling efficiency. This will lead to improved asset utilization and greater production levels. This strategy of integrating supply chains is critical ensuring capital assets will transition into operational growth requirements for major projects.

An analysis of a large oil and gas company revealed that to improve ROI by 1%, several financial levers had to be concurrently applied: expenses should reduced by 7.5%, production increased by 3%, and capital deployed decreased by 5.5%. These savings are not only possible, but imminently realizable. Our analysis suggested that supply chain could generate $120 to $170 million against current spending managed by SCM groups of $2.3 billion. Further savings could be captured in reduced cost overruns on major projects. Improved supply chain planning and logistics will further reduce inventory and lower operating costs. These improvements translate into a change in COGS and ROCE of 2.5% and 2%. Additional benefits will include improved efficiencies and productivity in manufacturing that is not inclusive in these estimated benefits. The timing associated with complete realization of these benefits was estimated at six to eight years. The primary risk associated is a failure to act quickly to deploy the strategies and practices across business units.

Achieving improvement in capital expenditures will require a rapid execution of supply chain management process design changes for fulfillment  across all business units. Moreover, a strong corporate supply chain function is critical to deployment of supply chain strategies. SCM should be proactive in  setting annual goals and objectives, implementing supply chain improvement projects, monitoring performance, allocating resources, setting standards of performance, maintaining supply chain structures, driving logistics excellence and developing the skills of professionals working in the function.

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In today’s Guest Blog, Alexander Zeller from Migration Translators comments on the supply chain for translation projects, how they occur, and how they are used in projects such as those involving contract negotiation.

Increasingly, the translation of web pages is becoming rooted in the virtual world but translation of contracts is becoming a much more important factor in negotiations.  In fact, there exists a translation supply chain, defined as the communication methods used to access translation contract projects and deliver them.

Before the rise of the internet and emails, translations were of course still required for many supply chain contracts and negotiations. Business documents, like overseas contracts, invoices and orders for goods sent from one country to another had to be translated.  In addition, the translation of personal documents required for immigration or study purposes in an overseas country for ex-pats to go abroad was often required.

The main issues were more to do with security than anything else, as much of the sending and receiving of documents would have been through the use of state postal systems which in faraway places may be both slow and unreliable. The translation supply chain involves transferring the source text to the translators and sending the two documents back to the clients, in an iterative fashion.

Today corporations requiring translations use a ‛virtual supply chain’ that enables both the contracting company’s staff responsible for translations to communicate with the translator. Once a client has sent the requirements for a translation project, the contracting team gathers together the necessary resources and sets the project in motion. The first step is finding the translator with the right subject matter expertise who is available to take on the project.  Contracts include translating not only legal terms, but technical terms as well.  Each translation company will have a pool of the best translators they can find in different areas, who may be located in many parts of the world. Those involved in the supply chain have to ensure the translators are performing given translation tasks to the best of their ability.

After a translator begins a job he or she will be asked to provide a sample of the translation so far which is likely to be between 400 and 1,200 words. This is sent on to an independent reviewer who will assign a score based on the quality and accuracy of the translation.

Clients can choose their own reviewer and which might include a contractor in their supply chain. Software is not used but a human reviewer assesses the quality. Once the reviewer has completed the review comments they are sent to the person managing the project, who will pass them on to the translator responsible for the project.

The translator can dispute any comments made by the reviewer and an assurance is given to the client that the translation is of high quality. In the end a score is given which is kept in a confidential database which is continually updated. This ensures that translation companies are using the best translators to complete their client’s requirements.

Effective process quality management is required to achieve reliable translating outcomes in the translation industry is an integral and crucial part of the whole translation process. The project manager is the key person who manages the relationships that have to exist between contract managers, reviewers and translators. They ensure that the appropriate payments are made to all those working within the supply chain, and that translations occur according to plan.  As contracts are reviewed and modified, ongoing management has to occur.

Beyond electronic means like emails, there are emerging suites of software that help to ensure that document exchanges occur smoothly.  Translation will continue to be an important component of contract management in the supply chain.

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Xeneta just posted their list of the “Top 24 Best Supply Chain Blogs“, which provides some great resources available to readers.  These blogs span a wide variety of topics, and when combined, give you an idea of just how many different topics are comprised in the area of what professionals call “Supply Chain Management”.  Oddly enough, when I mention that I work in the supply chain area, the response I most often get from non-SCM’ers is something around “Doesn’t that have to do with shipping stuff?” or even better “What is that exactly”?

Based on these blogs, you can see that they tend to cluster around the following areas:

Technology  – Supply Chain Matters (impacts of technology), Supply Chain Shaman (enterprise applications), Next Gen Transportation (Transportation Innovation)

Freight & Transportation – Cerasis Blog (small package and LTL), Freightos Blog (Freight and Logistics), , Flexport (Global Shipping), GCaptain (Facebook for Logistics), GLogistics (shippers and carriers), Shipping and Freight Resources, Transport Topics, Transport Monthly, Kaneisable (Consumer Distribution blog).

Air Transportation – The Loadstar (Airfreight), Air Transportation World,

General Logistics – Talking Logistics, Logistics Matter, Logistics Viewpoint, Forbes Logistics, WSJ Logistics, Journal of Commerce, Logistics Management, Transport & Logistics Magazine,

Distribution  – DC Velocity, Xenata

Supply Chain Education and Procurement Capabilities – Supply Chain View from the Field.

I would also add to this list, Spend Matters, which focuses on procurement technology solutions, as a key blog.  It is interesting that there are so few blogs on the world of procurement – a topic which we cover a lot in my blog.

Lots to keep you busy!

 

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I have been having a lot of interesting discussions recently with both procurement and legal executives who are increasingly concerned with the state of their contract management processes.  This is occurring for several reasons.

  1.  The exposure of many companies to greater risk is heightening the focus on contracts.
  2. The need to write better statements of work (SOW’s) and Service Level Agreements (SLA’s) is recognized as key to improved outcomes.  You get what you ask for.  Don’t expect platinum service if you specified silver.
  3. As Tom Linton stated in a recent Procurement Leaders interviews, PRICE = SPECIFICATION.  You can directly throttle the price of a product or service by limiting it’s specification, or alternatively, prices can be allowed to escalate if proper specifications are not effectively collected and identified ahead of time.
  4. Managers recognize that contracts, once written, become literally filed away until something bad happens.  Contracts should instead be a living document, as things will change, and measurements need to be embedded in them that allow individuals to understand if the relationship is going on track or not.  Of course, if you aren’t measuring something, than you have no leg to stand on if things go wrong and there’s nothing in the contract that says anything about how to handle unexpected issues.  There should at least be an agreed on procedure to deal with unexpected surprises.
  5. Litigation is escalating.  More companies are seeing non-performance issues arise, and are going back to their contracts.  Intellectual property is at the top of the list.  It costs a lot more to get out of trouble once you’re in it, then to spend the time earlier and write a better contract.

To become better prepared to a) write better contracts, and b) manage them appropriately once they are written, Paul Humbert and Robert Mastice have developed a great list of simple rules to follow in preparing a SOW and a contract.  Here they are.  Additional insights can be gleaned in their book “Contract and Risk Management for Supply Chain Professionals”.

  • Define what is to be performed
  • Learn from and do not repeat mistakes
  • Link payents to performance or progress
  • Develop a well-organized table of contents
  • Clearly specify the objectives to be achieved
  • Anticipate changes in needs or circumstances and decide how these will be addressed.
  • Seek input from the right people at the right time
  • Specify the project plan, schedules and milestones
  • Specify where the deliverables will be performed
  • Avoid making any unintended (implied) warranties
  • Specify the standards of performance requirements
  • Specify the applicable testing or acceptance criteria
  • Avoid incorrect, inconsistent or contradictory statements
  • Develop an order of precedence for the contract documents
  • Anticipate the need for interpretation and who’s judgment will govern

That’s it!  If you follow these rules, you probably won’t get into TOO much trouble…

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Over the road (OTR) trucking involves the use of hauling 53’ trailers behind a truck. The American Transportation Research Institute estimates that of the total cost per mile of driving a rig that drives between 80,000 and 125,000 miles per year, the average cost (including drivers wages and benefits) is $1.593 per mile, or which tire cost are $ 0.043 a mile, and fuel costs are $.403 per mile.

Many of the largest fleets in the United States recognized the value of retreads back in 1970s. Many large fleets have over a million tires on the road at any point in time, and of their replacement tires, the ratio of new to retreaded tires is typically 4.5:1. The primary benefit of retreaded tires is the reduced tire cost, less than 1.5 cents per mile, versus the industry average of around 4.5 cents per mile. And a retread will work on almost any casing, provided it meets the strict inspection requirements for the casing.  With the exception of one type of tire:  ultra-low cost import tires.

An Effective Business Strategy

In North America, the trucking industry saves more than three billion dollars annually by using retreaded tires. Safety is a paramount factor for large fleets, and the use of retread tires reflects senior executives’ trust in the reliability of retreads for their drivers and other drivers on the highway. Retreads are a critical component of what is commonly known as “Good tire management practices”.  OTR fleet managers recognize that the real value provided by retreads is not the initial price savings, but in the overall fuel savings attributed to the improved Rolling Resistance of retreads over lower quality tires.

The maximum number of retreads per tire occur for high quality (Tier 1) casings, which are often retreaded 3 or 4 times. Some retreaded tires have been found to have lasted over a million miles! This is because the quality of the casing matters when it comes to a retread.   Retread providers, which are located in driving distance from just about anywhere in the United States, will often work with fleets to pick up their used tires, and provide service on installation of retreads wherever the truck may be.

IbisWorld’s Procurement Report on Commercial Tires supports retreading as a major method to reduce total cost of ownership, noting that:

The retreading process consists of repairing all existing damage, resurfacing the tire and applying a new layer of tread to the casing. This process results in a tire with almost identical performance as the brand new tire, essentially giving the tire a second
life. Retreading a tire costs significantly less than purchasing a new tire, with retreaded tires costing an average $100 less than a comparable new tire. Moreover, fleet owners can retread their tires multiple times, allowing buyers to stretch out the tire’s life far beyond the original limit. Another option available
to semi-truck operators is to switch the tire’s position. After reaching about 500,000 miles in the drive position (attached to the truck’s rear axle), the operator can choose to install their tire on their trailer, which imparts much less wear than the drive position. By doing
so, the truck operator can get another 150,000 miles of use out of the tire before needing to replace it. Best of all, buyers can still retread their tire after installing it on their trailer, leading to an even longer useful life. …Fortunately for buyers, retreading suppliers have hundreds of locations around the country, making it easy to purchase these services as needed.[1]

Using retreads can save money, regardless of the metric fleets are using to measure their business performance. Examples of metrics include the following:

  • Cost per driver hour
  • Cost per engine hour
  • Cost per vehicle
  • Cost per mile
  • Cost per load

Using any of these metrics, retreads provide significant savings. And yet, decision-makers will often only consider the cost of a new, low cost imported tire at $225 versus a retread, (around $125- $150), and decide to purchase a new tire. What they are missing in this decision is that most Tier 3 and Tier 4 (low cost import) tires cannot be retreaded, and often have lower gas mileage, may fail prematurely, and may not last as long (10-40% lower life). For this reason, it is imperative that drivers and fleet managers look at the Total Cost of Ownership of using a retread tire.

Good tire management practices in the fleet and trucking industry are highlighted by the following actions:

  • Fleets will use all new tires in the steer position (3) that will normally last a year.
  • The new tires are retreaded, and then moved to the “drive” position (1), which is the second position on the truck. (Although it is “legal” to have a retread in a “steer” position, this practice is not normally followed).
  • After two years, the tire is re-treaded and moved to the “trailer” position (9). The tire may then also be retreaded a third or fourth time in the “trailer” position, as they do not typically wear as fast. (Trailers often sit at warehouses or distribution centers for long periods of time without being moved.)
  • The number one issue associated with avoiding blowouts is to keep tires at proper inflation levels.

Retreads cost less than new tires over time

There is a good reason why the largest fleets in the world use retread tires: they make solid economic sense. But they also are much better for the environment, and reduce the volume of tires going to landfill by a factor of 3 or 4.  So re-think retreads!

[1] Buchanan, Ian, IbisWorld Procurement Report, “Commercial Truck Tires”, December 2016, pp. 12-13.

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IBM’s new white paper “Making Blockchain Ready for Business”, in which they conducted a roundtable with a number of executives provides some important clues as to how the technology will unfold in the next few years.   There is increasing evidence that blockchain (or Distributed Ledger Technology) is not a standalone solution, but will emerge more as an open source utility, much like the Internet.  In that regard, it is likely that industry-specific applications will begin to emerge, and many of them will be around linking the physical supply chain and the financial supply chain.

The latter element of course refers to the complex system of business to business transactions that exists today in most organizational supply chains.  A recent white paper put out by JP Morgan suggests that the current set of buying channels that exists in most organizational supply chains is a dinosaur – literally a mammoth in this case!  This study suggests that for business-to-business (B2B) transactions, despite the new developments in payments,  businesses in the United States still largely rely on checks for paying their suppliers. A commonly cited reason for this is that “checks work”.  This is based on a survey of 412 respondents from the Association for Financial Professionals (corporate practitioners).  Amazingly, although the percentage of payments  is going down (see trend line in Figure 1), over 50% of organizations still write checks for their B2B transactions!  Well, of course, most small companies and entrepreneurs are going to write checks, (I rationalized to myself).  Wrong again!  Organizations making 1000 or more B2B payments per month are making 54% of their payments by check (see Figure 2)!

Figure 1

Figure 2

Figure 3

The article goes on to share even more stunning news.  (Mind you – I’m a supply chain guy, so this news was stunning to me, but maybe not to the reader…) . Only 5%% of payments are made by procurement cards – and 34% are made by ACH Credits! This is pretty incredible – as I thought for sure that organizations are moving more towards electronic payments.  The news here, in my mind, is that there is a huge upside for blockchain to come in and disrupt the whole system – and perhaps banish paper checks forever!

IBM is certainly leading the pack in terms of getting traction, especially after the news this week that they were selected to build a new blockchain-based international trading system for a consortium of global banks, a major win for the tech giant in the race to sell blockchain to Wall Street.  The banks involved will include Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit.  But remember, this is primarily the B2B financial network only – that is, inter-bank transfers for major financial transactions.  This is a comparatively small piece of the total financial system pie.  In total, there are about eight different players competing to become the blockchain utility of choice, of which IBM is one.

Practitioners are IBM’s roundtable noted that one of the biggest ways that blockchain will emerge is in global trade.  A practitioner noted that “For domestic payments, by and large, DLT is not vital, but as you move cross-border and more players enter the chain, there could be more value. It’s also important to remember what we hear from blockchain initiatives already under way in payments, that the cost savings are not coming in the processing per se but in the back office operational costs, the reconciliations, the investigations et cetera.”

There is also a big impact for blockchain technology to mitigate risk in the supply chain, according to one participant, and impact counterfeiting.

“Obviously global trade has lots of physical documents, and wet signatures being couriered around the world, and this generates many inefficiencies from fraud to documents being directed to the wrong place or taking a long time to get there. In our pilot we were able to reduce from 10 days to four hours the time it took to move all of the trade documentation from one customer to the other. That’s definitely a huge saving of time – and avoids many of the risk.”

Blockchain is in my mind one of those areas that supply chain practitioners need to watch carefully.  This one is going to make a huge difference – more than IoT, serialization, sensors, or any other emerging technology.  Hold on tight!

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In my earlier book with Gerard Chick on “The Procurement Value Proposition“, we advance the notion that buildoing a business case for investing in people, process, and technology improvement in procurement is key.  Many procurement assessments developed by consultants seek to provide an answer to the question “how far along are you relative to your peers in your procurement transformation journey”, and “which processes are lagging compared to your peers?” This is effectively a “snapshot” in time. While this can be an interesting exercise, it oftens fails to answer the direct of question “how should the procurement process be improved?” and “What is the potential return on investment?”

Procurement assessments can be applied in conjunction with the organization’s strategic plans and business objectives, and thus requires that it be contextualized within the ecosystem and political/business reality of the conditions facing the senior procurement executive within their enterprise. All transformation occurs within the constraints of an organization’s infrastructure (technology, social, managerial, financial, human resources, knowledge management, etc.). These components are not covered in most procurement maturity assessments but are referred to as enabler processes. These may be fleshed out through discussions, interviews, and organization-context specific formats. It is extremely important that these enabler processes be integrated with procurement transformation improvement initiatives in order for successful improvements and to maximize the benefit.

Moreover, a “snapshot” assessment will generally not consider the consistency to which supply chain processes are deployed. It will not determine the extent of deployment across different business units, but could be used to benchmark performance across business units. They may provide specific KPI benchmark levels for a process (in such terms as percentage cost savings).  However, I’d like to suggest that different KPI’s could be applied in different situations. (Note our earlier comment that the types of metrics being used to assess procurement at each stage are indeed a characteristic of how far along the organization is in its transformation!) Moreover, assessments provide a “baseline” of best practices that allows organizations to determine where they are today, where the biggest gaps are across their supply chain activities, and where are the opportunities. This roadmap can be used to develop a set of guidelines for deployment of best practices across an organization.   The more important question is – what is the impact of procurement transformation on shareholder return – a metric that every CEO and CFO really care about!

What is Total Shareholder Return?

As defined by Wikipedia, Total shareholder return (TSR) (or simply total return) is a measure of the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder expressed as an annualized percentage. It is calculated by the growth in capital from purchasing a share in the company assuming that the dividends are reinvested each time they are paid. This growth is expressed as a percentage as the compound annual growth rate.

In practice TSR is difficult to calculate since it involves knowing the price of the shares at the time the dividends are paid. However, as an approximation over one year it can be calculated as follows with:

Price_{begin}= share price at beginning of year,

Price_{end}= share price at end of year,

Dividends = dividends paid over year and

TSR = total shareholder return is computed as

TSR={(Price_{end}-Price_{begin}+Dividends)}/{Price_{begin}}}

Total Shareholder Return (TSR) is used as a measure of business success, and is impacted by a broad range of factors.

TSR is made up of two key components:

  1. The difference in company valuation between two periods in time (usually twelve months)
    1. This is heavily influenced by market conditions
    2. Market analysts also play their part by evaluating how well positioned they think the company is to perform within their respective markets
    3. Analysts are often influenced by financial statements showing the Cost of Goods Sold, as well as Net Revenue during this same period.
  2. The value of dividends paid during the same period.
    1. Making savings improves the bottom line
    2. Improving value and revenue grows the top line

Procurement does not influence all of these factors and there are many factors outside its control. However, given the pivotal role procurement plays between internal stakeholders and external suppliers makes its ideally positioned to reflect the broader organization.  Shareholder return may vary based on many factors unrelated to procurement transformation.  But let’s take a shot at trying to understand this further.

In the early stages of maturity, the primary objectives are to capture spend analysis, leading to price increases, which most directly impacts Cost of Goods Sold. As the organization matures, total delivered cost starts to provide improved customer performance, and impacts areas of indirect spend, which in turn improves sales revenue. Supplier innovation and improved market intelligence leads to better sourcing decisions, and category strategies are more closely linked to business unit and functional outcomes that drive overall organizational financial performance. Finally, the full spectrum of improvement in procurement impacts profitability and drives net income, which also improves TSR. This it the “hypothetical” view of how procurement maturity impacts TSR – but the reality is often not so simple.

What is the REAL Relationship of the PLTA to Total Shareholder Return?

While we would LIKE to see a simple linear relationship between an organization’s level of procurement maturity  and its Total Shareholder Return, unfortunately this relationship is not so simple. This is because TSR is a function of many different environmental factors, that span many functional strategies outside of procurement. Some of these are shown in the Table below, which show the different financial parameters that can be influenced by decision made in each of the functional strategies that exist. It also emphasizes that even a highly mature sourcing function can see its shareholder return diminished by unproductive manufacturing, delivery or market factors, and service issues that are plaguing its supply chain.

So, as you see it isn’t easy to justify procurement based on Total Shareholder Return.  While procurement can’t make the difference in a poorly defined business strategy, a lack of product innovation, or the “Uberization” of an industry, it is nevertheless an important business function that contributes value.  Some of the more important parameters  to consider include include working capital, impacting supply risk, Cost of Goods Sold, and in the end, supplier innovation that drive product revenue.

 

 

Design Source Make
> Net present worth analysis to investment over a period – Interest accrued.
> Comparing interest accrued/investment to revenue.
> Product positioning – segment
> Liabilities – Accounts Payable (Proportionate).
> Cost Savings
> Inventory levels
> Procurement – Metrics – Cost of proc/TC of raw materials
> Procurement ROI
> Cap-Ex
> COGS
> Net operating profit/income
>EBIT
> Manufacturing cost as % revenue.
> Revenue/employee.
>ROCE

 

Market Deliver Service
>Inventory Turns
> COGS
> Revenue/Profit.
> Accounts Receivable
> Share price change> Mergers and acquisitions
> Logistics cost.

> Returns

> Warehouse ownership

> E-commerce strategy

 

 

> % Change in sales
> Revenue form spares
> Inventory turns
> Share Price

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A lot of blogs and writers are discussing the role of machines vs. humans and their relationship, especially in the context of supply chain management.  Scenarios are being painted of computers operating in a real-time environment, using blockchain to process transactions, relying on Internet of Things to order goods and services, which are delivered by drones to consumers homes.  The reality of this scenario is far fetched indeed, primarily because futurists are dramatically underestimating the degree to which people organizations must change to deal with these technologies.  A similar level of euphoria existed 17 years ago, when people started playing against computers in chess.  Some readers may recall the level of discomfort when computers were playing against and beating Grand Chess Masters in the 1990-2000 period, described by Gary Kasparov in this book “Deep Thinking”.

“The growth of machines from chess beginners to Grandmasters is also a progression that is being repeated by countless AI projects around the world. AI products tend to evolve from laughably weak to interesting but feeble, then to artificial but useful, and finally to transcendent and superior to humans…Overestimating the potential upside of every new sign of tech progress is as common as downplaying the downsides. It’s easy to let our imaginations run wild with how any new development is going to change everything practically overnight. Human nature is simply out of sync with the nature of technological development. We see progress as linear, a straight line of improvement. In reality, this is only true with mature technologies that have been developed and deployed. We expect linear progress, but what we get are years of setbacks and maturation. Then the right technologies combine or a critical mass is reached and boom, it takes off vertically for a while until it reaches the mature phase and levels off.”

Kasparov also notes that it is important to recognize the role that machines have in AI, and the importance of humans “in the loop”, through the use of “Moravec’s paradox.

“In 1988 the roboticist Hans Moravec wrote, “It is comparatively easy to make computers exhibit adult level performance on intelligence tests or playing checkers, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility.   Computers are very good at chess calculation, which is the part humans have the most trouble with. Computers are poor at recognizing patterns and making analogical evaluations, a human strength.”

Or as Bill Gates stated in his axiom:

“We alway overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

These insights suggest that change management is not just option, but truly imperative in a period when so many new technologies are coming on-line. Waiting for something to happen will be result in failure to adapt, and ultimately, to extinction.

A central issue that emerged from discussions I’ve had with executives in the last month is the importance of the three big shifts occurring in terms of defining organizational governance, establishing the talent requirements for the change, and building the right level of trust between enterprises to share data.   Concern by executives is expressed around how to socialize these changes, the communication strategy for the digital economy, and getting people to adapt. The intent is to engage people to share “what decisions could you make if you had this specific information?” as a means to identifying how to design not only the user interfaces, but the timeliness and specific types of data required for these decisions. Being able to see what “experts” are doing in terms of “best practices” can help establish the essential features of the data platforms and interface mechanisms.

Another important element is how to incent suppliers to be honest and share their issues. How can you trust them to trigger orders, without having to ask them and check on them? How to reward people who go the extra mile, and using smart contracts through emerging technologies such as block chain?  These and many other questions are more interesting to consider then how fast the technology will be adopted.

 

The cultural transformation that will accompany these changes will be significant. Using the example of driving and “trusting” the Waze app to take one down the right street to avoid traffic, participants noted that Deere managers will have a hard time trusting new systems and follow their guidance. The change management portion of analytics will be a bigger inhibitor than the software and hardware changes. This needs to be explicitly accounted for in developing talent strategies.

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I had the opportunity today to listen to a fantastic presentation to a group of Lenovo executives, while working with their SAIL Executive Development program.  Kirk Skaugen, Executive VP and President of the Data Center Group at Lenovo, spoke to the group on some key lessons that he learned throughout his career, which began at Intel more than 20 years ago.  Kirk’s advice was I thought something that all supply chain students need to hear.  Here they are.

10 Pieces of Career Advice from Kirk

Little things don’t mean a lot – little things mean everything. People come in to present to me – but hadn’t booked a conference room and couldn’t connect their computer – and so they start 6-8 minutes late for a 30 minute meeting!  When I had to present to a CEO – I would book the room early, and make sure the screen was working! If I had a meeting with a client I would be sure to fly in early the day before to avoid being late. One time I heard it was a manager’s birthday, and I brought in a birthday cake for someone and it meant the world to her. As a result of these little things, I ended up getting a huge promotion.  When I asked my boss why, he said “because with you every little thing clicked” . Little things build up the level of trust through execution excellence, and people notice.

Burn your bridges and you better be a good swimmer. I was with a senior director of a big customer, acting as  his supplier. Now he is running the company and he is trying to sell to me at Lenovo! I have tons of of examples where people I used to work for are now working for me.  Beware of getting frustrated and closing doors, as it will come back to bite you!

Execution trumps intent. Most people will walk in with a plan but how many people actually say what they are going to do, and then do them?  One study I read claimed that about 10% of people who write their goals down and execute them make 90% of the wealth.   Everybody has a plan but are you executing it? Personally, I enjoy mentoring people who actually go do it!

Assume accountability. In a big organization – so many things fall through the cracks. Who are the people stepping into the cracks and assuming accountability?  People notice this.   You need to assume the problem is YOUR problem.   If you see empty Coke cans in a conference room, pick them up and recycle them, don’t wait for housekeeping to do it!

Trust overrides capability. I knew a person who was the world’s expert in a technology, but he didn’t get a high level assignment.  Why?  Because he had most capability but people didn’t trust him. The obvious expert didn’t spend time building trust with their boss to understand the decision-maker – and didn’t get the sign-up. The promotions go to people who actually get things done.  So if you assume capability to get things done, you will build trust and elevate people’s estimation in your ability to be a leader.

Development plans matter – have a plan “B”. Organizations constantly re-organize. I had a plan A for a lot of my career, but rarely did it work out.  My entire career has been a series of plan B’s.

Know your flexibility and market it! You can be flexible and if you do some things that you wouldn’t be able to normally do – then you can do more things. You need to be able to be very clear with your superiors about what you are willing and able to do, as well as what you don’t want to do. If you are clear, you are more likely to get the roles you are interested in. I marketed my flexibility to an executive, and they were making decisions quickly and almost passed me over – and then we moved to Singapore to a job I might never have gotten!

Think carefully about who you select for your Mentor. You need to be very careful about the person you want to select who has the same basic life principles as you. The best mentors are people who might be a peer, and you agree to make each other better.  That person can walk out of a meeting with you and tell you what you did wrong in that meeting and how people are perceiving you.

Lions don’t need to roar. Be humble and have humility, the world is driven by people. If you are responsible for something and admit things aren’t going well, then you will get more respect than if you pretend things are perfect.

Prepare and embrace the “big opportunity” when it arrives. You will get an opportunity to do something that is above your level of capability and you need to be willing to prepare like crazy for it. Spend two or three hours for every hour with your customer. Know your numbers. People get opportunities and they blow it and don’t take advantage of the moment.

Every student needs to think about these rules when they go out to work in an internship or a new job!

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