SUPPLY CHAIN MANAGEMENT: HOW ARE YOU REALLY DOING?

By Robert A. Rudzki, Douglas A. Smock, Michael Katzorke, and Shelley Stewart Jr.

Supply Chain Management Review December 1, 2005

If you still think of your process as purchasing, you are living in the 1960s. Competition today is no longer company to company, but rather supply chain to supply chain. Since many of us in the same industries use many of the same suppliers, a good procurement process must evolve into fully integrated supply management. The company that does the best job of integrating its supply network - in terms of objectives, strategies, processes, and data linkage - creates optimal competitive advantage for the entire supply network and optimal value for its shareholders and customers.

Take a quick pulse to determine if your supply organization is alive and well or a significant drag on your corporate competitiveness. Ask the following 10 questions. You should have a good sense of the answers yourself. Following the list, we present what we feel are the right and wrong answers.

1. Are supply chain goals integrated into the strategic plan of your business?
2. Do you know who your chief purchasing professional is?
3. What is the reporting relationship of the chief procurement officer to you? Does he or she have consistent access to you and other senior-level executives? Does he or she make presentations to the board of directors?
4. Does your procurement team have top- and bottom-line objectives? How do you set stretch objectives? Are procurement's objectives shared by other functions in the company?
5. What percentage of the external spend at your company is supervised by purchasing and covered by a written strategic-sourcing plan?
6. What percentage of spend is leveraged through internal spend pools?
7. Do you have the right leadership in your procurement function? Is your procurement head a leader, a follower, or roadkill?
8. What is the working relationship between purchasing professionals and those in other disciplines (manufacturing, engineering, R&D, finance, etc.)? Do they operate in silos?
9. What are the opportunities for training and improvement for the purchasing professionals in your company?
10. And most important: What is your level of personal commitment to achieving improved corporate performance through a best-in-class purchasing organization?

The answers:

1. Are supply chain goals integrated into the strategic plan of your business?
We feel this is a critical indicator that separates failing organizations from those that at least have a fighting chance to succeed. A "yes" answer to this question indicates that you at the very least understand the potential promise of supply-side benefits. A best-in-class example is Procter & Gamble, which has worked in recent years to properly position purchasing within the company. Leaders of such business units as Baby and Family Care or Health Care increasingly recognize the importance of good sourcing work. The influence of purchasing at P&G has been rising and spreading. CEO A.G. Lafley includes purchasing breakthroughs as one of six core capability areas that are monitored on a regular basis and on a formal basis twice a year. "If we are going to improve margins, we are going to have to do it largely through cost control," comments Keith Harrison, P&G's global supply manager, who oversees purchasing, manufacturing, engineering, and other operational functions. Breakthroughs are significant improvements, such as capturing core spend in the services area or implementing technology that dramatically improves cost performance.

If your strategic plan is to become more global, then purchasing needs to be included in that plan. If your strategy is to develop more proprietary products, then purchasing can play a role by tapping technology in the supply base. If your plan is to dramatically increase marketing, then make sure you have a sourcing plan for marketing. If you plan to grow through acquisitions, purchasing can play a crucial role not only in the due-diligence phase, but also in leading the post-acquisition achievement of synergies. Almost whatever you do, purchasing - working the right way with well-chosen suppliers - can help you do it better.

2. Do you know who your chief purchasing professional is?
On the surface, this seems like a ridiculous question. But first-hand experience tells us it pertains. In some Fortune 500 companies, it is even hard to identify who the chief purchasing officer is because purchasing is so fragmented. Some business units may have a fairly strong purchasing leader, but there is no central leader. Amazingly, we have found some business unit presidents - of extremely large divisions - who have no clue who their head buyer is. Typically, those units were making money hand over fist and paid virtually no attention to costs. Even if you are making a ton of money, you are failing your fiduciary responsibility to your shareholders if you are not reaching your full potential. And if you know absolutely nothing about the supply side of your company, you are missing out on an opportunity to influence one of the most important drivers of top-line and bottom-line growth.

3. What is the reporting relationship of the chief procurement officer to you? Does he or she have consistent access to you and other senior-level executives? Does he or she make presentations to the board of directors?
Some purchasing leaders feel that the chief procurement officer should report directly to the chief executive officer and even be considered for board status. We don't agree. The important issue is to make sure that the chief procurement officer is no more than one level removed from the CEO and has regular access to him or her. In a well-run company, you would expect the chief procurement officer also to make presentations to the board. You should have scheduled meetings with your chief procurement officer at least quarterly and on-demand access either way as needed.

4. Does your procurement team have top- and bottom-line objectives?
How do you set "stretch" objectives? Are procurement's objectives shared by other functions in the company? The correct answer is that procurement has both top-line and bottom-line objectives, and these objectives are shared with other functions in the company. You, as CEO, know what the objectives are and have input to those objectives, and there is an independent internal scorekeeper (e.g., finance). The opposite end of the spectrum is that procurement has limited "savings" objectives, nobody knows what the heck constitutes procurement's definition (and calculation) of "savings," and those limited objectives are procurement's alone.

5. What percentage of the external spend at your company is supervised by purchasing and covered by a written strategic sourcing plan?
The correct answer: 100 percent. There is no excuse for anything less. Best-in-class companies have already achieved this. Most companies do a pretty good job on money spent for production products (called "direct" in purchasing talk), such as steel, electronic components, and plastics. Their impact on corporate performance is well known. Many organizations do a poor job on services, information technology, office products, temporary labor, and a host of other areas that are increasingly important. Best-in-class organizations are tackling costs for legal and consulting services. Best-in-class organizations are taking aim at health care and marketing costs. Buyers at P&G supervise the company's $5.4 billion marketing buy. Everything at P&G must be covered by a sourcing plan. It is a metric that is followed. Attacking marketing expenses, such as promotional items, is a way to show big results fast. For example, one major company took a fresh look at both "standard" off-the-shelf promotional items and "specials" (involving the creative juices of marketing personnel), pooled that total spend, and found one vendor that could orchestrate the whole category - for a considerable reduction in costs. Of course, you set your priorities here. If the real estate people are already doing a good job, make it your chief procurement officer's last project.

6. What percentage of spend is leveraged through internal spend pools?
That is, is each plant or business unit buying its own office supplies or is that spend aggregated through a corporate "pool"? This is tougher to answer, but the percentage should be as high as is reasonable. Many companies have struggled with this issue. Certainly, non-critical products, such as office or repair and operating supplies, should be covered by an enterprise wide spend pool. At the other end of the spectrum are highly engineered, big-ticket components that are critical to the future of a given business unit. Not a good candidate for aggregation. Packaging and freight are good candidates. This is an important area in which to set goals and demand answers that make sense. Another issue: Most companies have highly fragmented product specifications that serve no useful purpose and are roadblocks to supply chain goals, especially aggregation for leverage, lean inventories, flexibility for reuse or resale, and even testing costs. For example, John Deere launched a major strategic sourcing program in 1999. One of the keystones was reducing the supply base and building partnerships with critical suppliers. Deere bought 46 grades of a plastic resin called polypropylene. As engineers designed products such as tractor steering wheels, they selected grades of resin without concern for supply chain goals, such as the ability to move inventory of materials across the enterprise if demand slowed for a given product. Engineers often chose specifications well above those required for the application. Deere had a proliferation of polypropylene grades. That meant tests were required for weathering and durability for multiple grades or colors. A cross-functional team, headed by a buyer and composed mostly of engineers, was launched with the goal of reducing the number of grades to around eight. Deere planned to reduce the supply base for polypropylene from 20 to less than six. Around the same time, Deere also tried to standardize industrial gloves used by factory workers; 424 different types of gloves were used. Annual expense: $1.4 million. There was strong worker resistance, and it took a senior management mandate to improve the glove buy.

7. Do you have the right leadership in your procurement function? Is your procurement head a leader, a follower, or roadkill?
Having the right procurement leader is critically important to ensuring the success of any supply chain strategy. This individual should understand your overall business objectives as well as have a superior grasp and understanding of the fundamentals of supply management. Having the full range of knowledge in supply chain from purchasing through logistics is a key enabler for the leader to perform this job efficiently. Also, a good working knowledge of the technology that is available is a must. Most good supply leaders are able to move between industries and apply the skills needed to get the job done. This leader should be a good judge of people and have great sales and communication skills. Ultimately, what this individual spends a great deal of time doing is selling the value of the organization. He or she also needs to be a visionary and one that is tuned in to the changing business climate. Great supply-side leaders are innovators and not afraid to take a risk. Being able to gain the respect of critical business leaders as well as having credibility with the supplier community will cause this leader to be effective.

8. What is the working relationship between purchasing professionals and those in other disciplines (manufacturing, engineering, R&D, finance, etc.)? Do they operate in silos?
Traditionally, the role of most purchasing organizations supporting manufacturing businesses was to negotiate, develop contracts, and place orders for parts and materials. Engineers designed and decided sources at the quantities and schedules defined by the manufacturing organization. This separation of activities led to supply-base proliferation and spend diffusion. Another problem: Purchasing focused much of its energy on expediting parts deliveries and coordinating the short-term resolution of quality issues. In the 21st century corporation, purchasing must play a strategic - not tactical - role. It is important that sourcing and technical professionals work in teams, starting with new-product development. At Buell Motorcycles in East Troy, Wis., founder Erik Buell would launch product-development through a meeting with internal product development teams made up of engineering, sourcing, and other professionals. He would stipulate key performance goals for the new sports bike: acceleration speed, look and feel, durability, and price. It was the job of the buyers to make sure engineers kept the project within cost guidelines - a trait that had become an almost fatal characteristic of Buell's parent, Harley-Davidson. Sourcing engineers would also scout the supply base for new technologies, such as a dramatic new metal-molding technology used in the Firebolt that reduced a 22-part structure to one piece. Then buyers brought in key supplier partners to help develop the bike. Giving technical personnel free rein is a prescription for corporate disaster. Of course, the purchasing and finance departments must be closely engaged. Best-in-class companies today are also forming close alliances between sourcing and marketing.

9. What are the opportunities for training and improvement for the purchasing professionals in your company?
Some companies have no opportunities for training for purchasing professionals. If yours does, is the focus on the right subjects? Topics covered should include strategic sourcing, supplier partnering, negotiating, innovation tools, and stewardship. Again, start with the process: strategic sourcing and the role of suppliers. Then make sure your people are getting trained in new technology. An important subject is stewardship, including social responsibility. You must make sure your suppliers are following, at a minimum, legal mandates on the environment and labor. Companies should also have goals to promote diversity among the supply base. A good resource is the Institute for Supply Management website. Sadly, training is often the first line item eliminated when times get tough. Improving your purchasing skills and effectiveness should be your first priority when times get tough. Do you rotate your best high-potentials through the purchasing department? Some best-in-class companies make a point of doing so. Purchasing provides a unique opportunity to learn about supply markets, negotiations management, internal cost considerations, team leadership across multiple functions, and the incredibly enabling power of your supply base.

10. And most important, what is your level of personal commitment to achieving improved corporate performance through a best-in-class purchasing organization?
Everything you do?and don't do?sends a powerful signal throughout the enterprise. For example, do you subject your purchasing department to an annual, tactical budget debate with every location in your company, where the opportunity to optimize the whole company's performance is lost in local "service charge" arguments? Or does the head of purchasing present his or her business case to the executive team, outlining purchasing's commitments for the coming year in exchange for a strategic decision regarding purchasing resources and budget? Even if you just say supply side is important, that's a positive start. We are not advocating that you learn strategic sourcing or contract management. We are advocating that you at least know the concepts and ask the right questions. Incorporate sourcing into your strategic plan. Set at least one or two measurable goals related to sourcing, and then measure them. Quarterly is fine as long as the chief procurement officer has access to your office. It is also important that you show interest in your most powerful allies?your supply base. Make sure your business-unit leaders have a personal relationship with the CEOs of your two or three most important suppliers. Participate personally in annually recognizing your very best suppliers. Let them know you value their role in your success. Organizations go through phases as they move toward outstanding supply management. Ask your chief procurement officer to indicate where you are as a first step.

R. Gene Richter, a famous American chief procurement officer, developed a maturity curve (see Exhibit 2) to show typical steps in the transformation process. His maturity curve concept has been widely adopted.

Phase I ("Getting Started") is characterized by: (a) a considerable amount of maverick buying (ordering materials and services without regard to the negotiated contracts), (b) minimum coordination between decentralized procurement organizations, (c) a few major breakthrough contracts negotiated each year, (d) a need to ask suppliers how much was spent last year on various materials and services, and (e) the company doesn't think that acquiring legal services, employee benefits, or advertising is "buying."

Phase II is known as "Where You Want to Depict Being When Asking for More Resources." It is characterized by: (a) most major commodities are negotiated and leveraged, (b) maverick spending is minimized, (c) most transactions are automated, (d) buyer training is starting to pay off, (d) supplier pricing is under control and there is good coordination with accounts payable, and (e) people are starting to develop elaborate excuses for not involving procurement in the acquisition of legal services, employee benefits, and advertising.

Phase III is "Where You Want to Depict Being at Performance Review Time." It is generally characterized as follows: (a) most sourcing decisions are now based on multiple factors instead of just price, (b) the number of suppliers has been reduced to less than five in each global commodity category, (c) all categories are managed by a multifunction, multi-geography team (led by a procurement member), (d) a written sourcing strategy exists for each spend category and is being implemented, (e) procurement is being asked to get involved early in the design or project-development process, and (f) there is virtually no maverick buying.

Phase IV is the "Almost Perfect" phase. Here: (a) all procurement decisions are perfectly aligned with corporate goals and objectives, (b) within each category, each supplier's percentage of business correlates with its performance rating, (c) suppliers rank your company as their best customer (not their easiest), (d) other functions within your company give procurement an 80-to-90 percent approval rating, and (e) employee morale is at an all-time high. The end result of Phase IV is that the whole supply chain (including manufacturing, logistics, scheduling, distribution, and accounts payable) now reports to procurement, business friends want to come work for the head of procurement and headhunters keep calling, and - primarily because of the work done by procurement - your company stock options are worth millions (Richter's words).

In all seriousness, once you have committed to the concept that supply-side management is a critical component of corporate success, the most important steps are:

1. Establish clear and measurable goals.

2. Make sure that purchasing - or more broadly supply chain management - is appropriately aligned in the company.

3. Part and parcel, of course, is that you have the right corporate structure (centralized, decentralized, or hybrid).

4. Then you must make sure you have a leader in place who can implement the change you desire.

5. In today's environment, it is particularly important that you have the right tools and training in place.

6. And lastly, measure performance on a regular basis.