Supply Chain Leadership V: Howard Richman
Lessons Learned from a Career in Procurement
As part of our weekly Supply Chain Leadership, I interviewed Howard Richman, who I am co-authoring a new book with (“Procurement Confidential”). His insights last week were stellar as usual!
Howard Richman has a background in economic geography, and his initial interest was in environmental and resource issues, before it became so popular! He observed how private corporations have the greatest impact on how resources are used, so while getting his graduate degree in geography, he also got an MBA in finance. His first position was with Air Products and Chemicals in finance, and he quickly became bored with it. But he did learn that finance is a necessary skill to take with you wherever you go, and he sought a job where he could always say that “today, I was able to impact the bottom line”. It became clear that the two functions where this was most applicable was in sales and procurement.
Howard worked in procurement in a number of industries over his career: in defense for Sikorsky Aircraft Division of United Technologies (UTC) buying the turboshaft jet engines, then in the UTC corporate office where he had to combine and leverage spend in another area where he had no previous knowledge – travel, hotel, car rental and credit cards – across multiple companies (Pratt & Whitney, Carrier, Otis and others). He then moved on to buying plant capital equipment, then raw materials and commodities at M&M/Mars (confectionery); IT procurement at GSK (pharma); all Indirect procurement at Merck (pharma) and Citrix (software), and even hotel operations and marketing procurement at Intercontinental Hotels Group (hospitality). Howard states that “I was always on a steep learning curve. Making the move at M&M Mars from being a plant purchasing manager – buying the plant production equipment – to becoming a hedger and trader of commodities (corn syrup, soybean oil, wheat/flour and oats, etc.) was one of my biggest challenges, and was by far the most dynamic thing I’ve ever done. Huge amounts of money changed hands every day, resulting in huge wins and losses. As Mars is a private company, these wins and losses were reported straight to the owners of the company every day.”
If you come in contact with any one of the thousands of associates at M&M/Mars, past or present, the first thing every one of them will refer to are the five principles of Mars: Quality, Responsibility, Mutuality, Efficiency and Freedom. Every associate will know them by heart and live by these principles. The principles help everyone to become very focused, and Mars is the strongest culture I’ve ever engaged in. When I was there, an employee’s base pay was subject to upward or downward adjustment every 4 weeks, based on exceeding or falling below two metrics – Net Sales and Return on Total Assets. Because everyone’s base pay was impacted, this supported quickness of decision-making. At Mars, nobody had an office. It was totally open communication, and partitions between desks could not be more than 3 feet high. Many meetings were spontaneous as people were bumping into others in the hallway.
The company rewarded risk takers, even when the results were suboptimal, as long as they were based on facts and data. For example, one woman was trading foreign currencies, and took a strong exchange rate position that went against her, losing $10 million! The next week, Mars promoted her to head the foreign currencies trading desk because she had the guts to take a stand! I’ve never seen a culture like that!
Procurement (Commercial as it was called) was one of the most highly regarded of the professions. They did not measure savings, and they refused to track it. The only metric that mattered was how you were doing vs. the market and the competition – were you getting a lower price than Hershey or Nestle? Beating the market and the competition – that is all that mattered. Don’t talk to me about savings – it is a meaningless concept! Mars also dictated that all commodity shipments be done by rail if possible to reduce environmental impact.
When I became a commodity trader and hedger, the trading team all sat in a large oval space next to one another so we could continually talk with each other. We talked about the sugar market, the currency market, the cocoa market, the grain and oilseed markets (corn, wheat, soybean oil, oats), and bandied about ideas of hedging and trading strategies using futures, options and physical contracts. Everyone had good and bad market days, so you had to maintain an equanimity and not get too excited or too down with good and bad market moves. Three months into the job, Gorbachov was overthrown in Russia and the grain markets tanked. Corn, soybeans, soybean oil, wheat – all of them crashed, limit down, two days in a row. I was down a lot, but I analyzed supply and demand scenarios and felt that it was an overreaction – so I proposed to my boss that we buy more and take longer positions at these lower prices. He agreed with me, and the next day, I made a huge buy, adding to my position. An hour later, Boris Yeltsin stood in front of a tank, the coup failed, and Gorbachev came back into power! The markets immediately reversed course and skyrocketed limit up, and we ended up over a million dollars positive at the end of the week. The secret to that success was in not letting my emotions get to me and relying on facts and data in my decision making. Mars was a culture unlike any other I’ve ever experienced.
Procurement’s Organizational Structure
Howard also comments on what an optimal procurement structure looks like.
“I’ve reported up to manufacturing, to operations, to finance, to accounting and even to tax and treasury and global shared services. The best structure depends on what procurement is responsible for. If a company is heavily dependent on direct goods for its margins, for its production, and for its profitability – Procurement will report frequently through operations or manufacturing roles. It is appropriate that it do so. In those industries you have tighter margins.”
When I was head of procurement at Citrix – 95% of what we bought was indirect, not direct materials. When managing indirect spend, is it better to report up to a finance organization, or global shared services, or to tax and treasury? No matter who you report to, it is critical to understand how they see procurement’s role. What should procurement be doing?
One of the most successful of my procurement groups was at Merck. We reported up to the President of Manufacturing, even though only 30% of their spend was direct. But he was a visionary guy, and he wanted to use procurement as the tip of the spear to make a cultural change. He wanted to create a culture of urgency and faster decision-making – where people would not be happy with the status quo and understood the necessity for change. That mattered to me, and was a defining reason for why I joined Merck. Through his vision, procurement delivered a billion dollars in savings through cross-functional strategic sourcing teams – which well exceeded our guidance to Wall Street.
No matter who you report in to, you need to understand what that leader really wants to achieve. Will it be the flavor of the month, or does it encompass a real cultural change? At Citrix, I was invited to meet the Comptroller who also managed Global Shared Services. After 15 minutes of talking with her, I could see she was a visionary who wanted to rock the place, and do it at a global level and scale through changes of people, process and technology. I knew it was the right place for me, regardless of the reporting relationship.
Oftentimes, procurement is NOT part of the business strategy. When I arrived, Citrix was tracking 28 metrics and the only metric that aligned with procurement was operating profit. I knew I had to make procurement different to align with the strategic metrics of the company and support those metrics. And that is the real challenge: how do you see yourself differently first so others can see you differently within the company. I’ve found over the years that 80% of negotiations are internal and only 20% are with suppliers. Those internal negotiations are a lot of hard work, but it is imperative that you get your internal stakeholders on the same agenda as you.
The Chief Mission of Procurement
You’ve heard me state that savings are the worst procurement metric, with the exception of all other procurement metrics! But procurement should not be about savings, despite the fact that many procurement managers see themselves as being that. Instead, they should see themselves as people who help solve business problems and make the business more competitive by discovering integrated business solutions, and by spanning boundaries of the different functions and geographies. If you look at it in an integrated way and span those boundaries to make good business decisions – that is a huge cultural change. Getting the right culture in place to solve business problems, and to improve every process and help lead cross-functional change – that is procurement’s job. Because savings are not sustainable and doesn’t bring you the value you’ll need. Stakeholders will spend the savings on something else. Culture must incentivize people to do the right thing…
Advice to Students
I learned from Thomas Friedman (NY Times columnist) that the only thing that is important today is “learning how to learn”. The world is changing so fast, so one of the most important things to learn is how to be able to ramp up quickly, tackle new areas, and get on the learning curve quickly. That will differentiate between those that are successful and those that are not. Whatever facts and data you know can be easily accessed through technology and will not differentiate you. Others can learn what you know, but learning how to learn is the key.
You also need be honest about your core strengths – quant skills, analytical skills, or soft skills – and accentuate your strengths, and determine if your weaknesses are career limiting? If so – you need to tackle them. Focus on the hard things first – and develop skill sets that you can bring with you. Lean into discomfort, and learn how to get comfortable in that uncomfortable place. And grow with that – before doing the things you love. But along the line, do something you love! I wouldn’t leave the office until I had an impact on the bottom line, solving a business problem – and that is why I love procurement!