The Procurement Value Proposition: The Rise of Supply Management – Chapter 11

Chapter 11: Introduction to Innovation Debates

 

Overview

In this chapter, the intention is that you take subjects raised and opinion from the book and look to develop your own discussion regarding the issues. The issues we feel are most pertinent for further situational analysis are:

  • talent: finding it, developing it, keeping it;

  • building team competence frameworks for contemporary procurement;

  • thinking about the future;

  • dealing with 21st-century risk;

  • sustainable procurement.

In designing your event or workshop you will want to explore a number of perspectives regarding the issue at hand. In the issues presented in the book we have drawn on particular insights generated from our own work with CPOs and procurement teams in a range of organizations.

You will need to develop a set of substantive questions to address in relation to the issue you are looking to explore. You will also need to plan out your event, for example working together and then splitting into syndicate working sessions. Each session should combine some formal input from a facilitator and be combined with structured discussions aimed at addressing your key questions.

Event styles

To help structure overall discussion (and presentation of thoughts and ideas) an event model that details how you will run the day should be developed (see below) and introduced to your delegates in advance.

What you are looking to do is capture from the attendees what they see as the hot issues in your business and how the procurement function can best align to support and generate value. But you do not need to be prescriptive in this. Your principal aim is to capture the views from the‘outside in’ as you will have a fairly good understanding of the ‘insider’ view. Effectively we want to get people to talk about how they see the world changing, how they see the organization changing and how they feel that organizations can better leverage the supply side of business to create value.

You can ‘seed corn’ the discussion via the pre-event work you ask delegates to carry out or by inviting guest speakers.

Title/theme

Detail the overarching theme and any rider so that it is clear from the outset exactly what you will be doing on the day. As time can be precious it is useful to set your delegates ‘things to make and do’ in advance so that they come thinking about the issue.

This can be set around a cascade, for example:

  1. What is happening in the world?

  2. How does this impact our business?

  3. How will this impact procurement?

Format

You need to consider in advance the format of the event. For example, you could invite one or two ‘thought leaders’ or experts to provide their view of how the world, business etc are changing and what their hot issues are. This will set off the discussion. Having a moderator or facilitator ensures that everyone contributes and that each theme moves on. We have prepared a workshop agenda template as an example of how the day might be structured (Figure 11.1). Additionally, ensure you have the room set up so that people can speak freely and easily; a cafe style is probably best as theatre-style has everyone facing in the same direction. Keep table sizes manageable so that interactive discussion is easy. Also monitor the tables to ensure that people are talking and that no individuals are dominating the discussions.

 Open table as spreadsheet

EVENT TITLE:
Event Date:
Event Venue:

Version 01

Event Theme/Title

Start Time

Duration

End Time

Event Session

Content

Lead Person

Infra-structure

9:00

0:15

9:15

Coffee

9:15

0:15

9:30

Welcome

Introductions, purpose of the day

Facilitator

Laptop and projector

9:30

0:30

10:00

ICE BREAKER:
What do we think of when we think about X?

Short Introduction to the session. Followed by each of the delegates sharing views.

Openner followed by all

Laptop and projector

10:00

0:45

10:45

Presentation

30 minute presentation to set up an innovation debate.

Speaker

Laptop and projector

10:45

0:15

11:00

Coffee

Tables choose a scribe and a rapporteur

All

11:00

0:45

11:45

Group work and feedback session

Group discussion. Each table to feedback.

All

Pens, paper and Flip Charts

11:45

0:20

12:05

Presentation on impacts of change

15 minute presentation to set up pre-lunch session

Facilitator

Laptop and projector

12:05

0:10

12:15

Bio Break

12:15

0:45

13:00

Group work and feedback session

Group discussion. Each table to feedback.

All

Pens, paper and flipcharts

13:00

1:00

14:00

Lunch

14:00

1:30

15:30

Presentation with group work and feedback session

30 minute presentation on the XYZ

Speaker or Facilitator followed by All

Laptop and projector; pens paper and flipcharts

15:30

0:15

15:45

Tea

15:45

1:00

16:45

Innovation Debate

How can we make XYZ happen

Speaker or Facilitator followed by All

Laptop and projector; pens paper and flipcharts

16:45

0:15

17:00

Closeout

Summary of day

Facilitator

Figure 11.1: Workshop agenda template

Moderator/facilitator

It is best to use a facilitator to moderate the discussion. You can invite a facilitator or do it yourself. You don’t have to be very experienced in doing this but to be effective you must stick to a format. To moderate or facilitate a discussion can be daunting if you are not sure what you need to do. Often sessions wind up with people speaking beyond their allotted time, or with delegates feeling ‘talked at’ or not included. As the name suggests, innovation debates are just that: debates. They need to be interactive and you and any speakers you invite need to be engaging. So here are some things to consider:

  • Take nothing for granted. If you are introducing people, make sure their names and titles are correct. Make sure you know how to pronounce their name. Establish in advance how you and the speaker(s) will be heard – from a podium or walking around with a wireless microphone.

  • Avoid formality. Avoid ‘formal’ introductory remarks as it slows things down and creates a spurious context. It also makes it much harder to develop the interaction you will want. People may be shy and speaking in public can be embarrassing – so the more informal the event the better.

  • Start with an opening question. If no formal introductions, you should let people know that this opening question relates to the ‘big picture’ view of the topic. By taking this approach you will remain in control and be able to create a more interactive environment from thebeginning.

  • Shorter is always better. Short, to-the-point questions are usually best. Longer questions require longer answers.

  • Follow-ups. A great moderating technique is to ‘follow-up’ a comment with things like: ‘What’s your take on what X said?’ or ‘Can you give us an example?’ In doing this you are looking to provoke candour and spontaneity in your delegates’ responses.

  • Get people to talk to one another. Try to get people to talk directly to each other. This isn’t easy but an effective tool is to encourage interactive dialogue from the outset. But you must control it.

  • Get the delegates involved early. If you’re looking for participation, wait no longer than 20 or 30 minutes before bringing in the delegates. The longer you wait, the harder it is to get them involved.

  • If you don’t get any questions, don’t panic! You can ask delegates or your speaker(s) questions to get things going. You can even press down on a friend in the audience and ask them what they think.

  • Final comments. Allow each speaker a minute or two to respond to a final ‘big picture’ question. Some options: ‘Are you optimistic about the future?’ Where do you think we will be in five years?’ ‘What one point or theme should we take from this discussion?’

  • Thank people. Make sure you thank those who contribute, by name if possible, and ask the delegates to join you in expressing appreciation with their applause. Thank the organizers (and sponsors if there are any) who helped to make the event possible, and let everyone know how much you enjoyed moderating the discussion and appreciated their active participation.

Timings

How much time you can spend on planning and executing an event will depend on several things:

  • what level of authority you have;

  • whether it will cost money: for speakers, room and equipment hire;

  • what level of senior support you have for establishing the debate.

If we assume the above has been taken care of, we feel from our experience that a half-day session well managed is often best. The template in Figure 11.1 gives consideration to things such as timings, equipment needs, breaks and meals.

You should aim to record the session and feedback to the participants as well as those for whom you have established the event. You can record the event (electronically) to capture the richness of the discussion, but assure the participants that the event is under the Chatham House Rule (ie there will be no attribution).[1] If at a later stage you wish to attribute comments in a report you will need the person’s express permission to cite them.

Finally, you must allow good time for people to get to the event and settle before the work begins.

[1]The Chatham House Rule: anyone who comes to the meeting is free to use information from the discussion, but must not reveal who made any comment. It is designed to increase openness of discussion.

The innovation debates

At the end of this section of the book you should be able to:

  • establish a debate regarding the key current issues in professional procurement with a view to evoking change;

  • express to colleagues – in your own organization and across the business – in a non-confrontational and inclusive way why these changes are necessary;

  • define procurement in relation to related concepts such as risk and sustainability;

  • evaluate the criticality of the challenges and how they affect procurement and the other SBUs in your organization;

  • argue the need for these issues to become an integrated part of procurement rather than separate add-on issues;

  • explain the underlying theoretical perspective and structure of the issues.

Talent: finding it, developing it, keeping it

Background

As the economy moves slowly out of recession, the demand for top talent in procurement continues to grow. Indeed, CPOs we have spoken to have indicated that finding enough qualified talent is amongst their top management concerns.

Contemporary procurement‘s role is progressing from decision support to one requiring a predictive capability. Procurement professionals must be commercially aware and analytical, focused, respected across the business, collaborative, influential, persuasive and visionary. In our view, the lack of emergence of these skills rests on three factors:

  • Many procurement departments have had success in increasing their influence on indirect spend in the business, yet as their influence has grown in respect of spend management, it seems that the requisite number of staff to manage that spend has not been recruited in line with the growth.

  • The volatility of commodity prices: in an attempt to manage the risk, this uncertain environment has generated senior managers who have been looking to procurement to use its teams to round in on the issue. Yet frequently the CPOs we speak to either do not have the staff numbers to do this, or have people woefully lacking the prerequisite skill sets mentioned above to fulfil the need.

  • Since the mid-1980s we have witnessed change in both procurement and business in general; along the way the skill sets of many in the procurement function have remained at best tactical whilst the strategic influence of procurement demands something different.

Our view is that some can be retrained, while others – unable to adapt to today’s more strategic skill sets – will need to find jobs elsewhere in the business or be transitioned out completely. These drivers have both increased demand and, in our view, changed the fundamental requirements of what ‘procurement‘ talent means.

The imperative – to get the right talent right now

It is critically important to attract the right talent and quickly. As opportunities arise, evaluate them for potential attractiveness to candidates:

  • Where are you based?

  • Has your business been through hard times?

  • Is the salary you are offering attractive in the current job market?

  • Is the scale and scope of the role appealing enough to attract top talent?

You need to develop a clear expectation of the type and quality of the people you want and how to position the role in the job market.

Recruit for talent, not background

It is critically important to differentiate between your requirements and your preferences so that you don’t waste time searching for the ‘nice-to-haves’ rather than essential requirements.

In particular, the best procurement organizations want people who can make sound commercial decisions. The traditional transactional skills of procurement – on which the function was built – are changing, with increasing importance being placed on people who are culturally aware. Look for people who are collaborative, innovative, diligent optimizers with strong leadership skills.

These people can offer decision makers with more choices and alternatives, higher-precision controls and levers to achieve desired outcomes. They will be capable of optimizing global networks of assets and talent, not only their own but also those of partners and customers.

How well do you know your HR department?

One area where there is a great deal of room for improvement is in the dynamic between HR and procurement. If you want top people don’t get out your standard job description template. To attract the best people to apply for your vacancy make the job description compelling; explain why the candidate should be excited about this opportunity. Then describe the duties, and only briefly mention the requirements. If it is not a challenging job who will want to apply for it?

Then make your decisions quickly, candidates are most receptive to offers in the first week after their interview, don’t let good candidates die on the vine.

Remember that procurement skills sets have evolved

Global experience is an increasingly important requirement. Today, if a candidate for a strategic position lacks global experience, keep looking. You need people who can:

  • influence;

  • network across the business;

  • articulate procurement‘s value proposition;

  • convince functional managers to involve procurement in their activities from the outset;

  • communicate at all levels.

Today’s game changers are those with the ability to influence others in a way that makes procurement effective, respected and accepted.

How to retain the best people

The best strategy for retaining star performers is to make sure you make good recruitment decisions to start with. Be sure to hire some people who are good at what they do, but who will top out at a level they are happy to stay at.

When it comes to your star players you need to accelerate their potential to rise within the hierarchy or create opportunities for them to gain breadth. For example, if someone is very good at sourcing a particular commodity, advancement may take the form of growing laterally as opposed to vertically – moving into different categories or leading special projects.

Conclusions

To improve recruitment and retention levels in procurement, it is crucial to create a deeper working relationship between procurement and HR. In order to build strong partnerships that will allow talent management to succeed, functional and procurement executives need to go beyond their comfort zone and adopt a much more creative, candidate-centred approach to recruitment and retention.

Procurement managers can no longer rely entirely on HR, and must instead shoulder some of the responsibility for recruiting the best and the brightest. By investing time and resources, developing clear and appropriate job roles and setting out clear paths for professional growth and advancement you will find, develop and retain the talent your organization needs.

Setting up your own event

At www.koganpage.com/pvp we set out how to set up an event in your organization or team to establish a debate regarding talent development and retention.

Please go to www.koganpage.com/pvp for a full set of PowerPoint slides covering the talent innovation debate.

Building team competence frameworks for contemporary procurement

Background

The capability of many high-performing businesses that align their activities with those of equivalent or complementary organizations is seen as a key factor in successful performance and sustained competitive advantage. The importance of relations with other organizations, such as suppliers and customers, is fairly obvious in contemporary businesses.

So it should come as no surprise that the effectiveness of teams and individuals in business functions such as procurement has become an increasingly important priority. We have already discussed the rising profile of procurement purchasing and of relationship management activities. These changes to the function’s role and contribution to business strategy have implications for skill sets. There is widespread recognition that increasingly professional procurement practitioners are required to think and behave more commercially, with a strategic and analytical mindset. They must also think in terms of, and take decisions in, wider supply networks. Added to this, for their knowledge to remain relevant they need to learn more effectively, and proactively drive their personal development needs.

Today there is a plethora of opinion on this aspect of procurement, including blog posts, white papers and feature articles. However, most of it is disjointed and focuses on the functioning of procurement systems and how they perform rather than investigating competence requirements for equipping people to manage and operate in inter-organizational networks.

Innovation debate

This aims to address the following issues:

  • What do businesses and their teams need to learn about operating in cross-functional roles in order to support effective strategic procurement?

  • How can they facilitate the required learning?

  • What are the factors that enable or limit learning?

  • How can continuous functional and personal development be encouraged and promoted?

Currently the majority of strategic procurement people work in teams responsible for particular product/service categories. Moreover, within these category teams, people will focus on specific subgroups, so there is a natural tendency for the creation of supply networks as they often match up with supplier and customer categories.

This innovation debate will help you to look specifically at what generates value-adding supply management. What are the skill sets, the knowledge acquisition and personal characteristics implemented by the best? And how do these factors differentiate the best from the rest?

Clearly at the supply network level, it is in the compilation of ‘the team‘ that businesses need to focus on. They need to ensure that the team has the competencies necessary for the roles and activities demanded by strategic procurement.

What you can do next

You can establish an event at your organization to help you understand how you can work with both procurement and other stakeholders to build a high-performing procurement team; a team that communicates and collaborates inside and outside your business to engender procurementexcellence.

In your event you need to ask your delegates to consider specific network management roles:

  • network coordinator;

  • relationship manager;

  • innovation developer.

This will help to keep their focus on strategic procurement, rather than more traditional procurement roles. To develop your understanding of what differentiates high performers from satisfactory and poor performers, you might think about encouraging delegates to identify specific cases ofteams and individuals, and characterize how and why they differed from others.

As already suggested, you should record your discussions and later analyse them to draw out themes that will help you to understand patterns of effective and ineffective performance. You can then develop categories reflecting the distinguishing features of each.

To help you establish your debate we have identified below what we found from the discussions we had with CPOs in writing this book.

Examine the key personal attributes

The key attributes are, unsurprisingly, relationship management and credibility. The best teams are confident and capable, which means that they can challenge others without being confrontational.

However, effective procurement and effective performance management roles are different; for example the skill sets required to be a good ‘buyer’ do not equate to what makes a good strategic procurement professional. They are very different.

Contemporary procurement professionals need to be good communicators; they need commercial awareness, ability to demonstrate their commitment to the role and a willingness to expend discretionary effort. Such individuals also have a propensity for continual personal and professional development. When it comes to their personal style they are inclusive and consultative and demonstrate flexibility in their approach to work. Typically they will have good planning skills, be technically capable and act with probity.

Key elements of the team

We feel that there are six major themes and associated attributes required to build a practical competence framework for strategic procurement professionals. All are critically important, requiring simultaneous action. We asked those we interviewed to rank them in order of priority, reflecting the need for and importance of each to them in establishing a high-performance team (Table 11.1). High-performance procurement teams operate with a broad remit and in cross-functional network roles. Each of these roles should be developed through a set of behaviours, as it is far more reliable to identify behaviours than attitudes when evaluating competence.

Table 11.1: Roles and attributes of high-performing procurement teams
 Open table as spreadsheet

Role

Attributes

Strategy development

A high-performing team will develop a strategy, which is supported by robust evidence, has clear objectives, and is championed by key stakeholders.

Strategy deployment

A high-performing team plans and executes its strategy, monitoring outcomes against plan and adjusting strategy, objectives or actions as necessary.

Relationship management

A high-performing team actively develops and manages relationships.

Setting out your stall

A high-performing team has a planned approach to developing its position in its network, but is flexible enough to take advantage of opportunities that arise.

Network knowledge

A high-performing team has a deep understanding of the network(s) within which it operates.

Knowledge and learning

A high-performing team actively promotes learning and enhances its expertise through developing knowledge and knowledge-sharing systems.

In Table 11.2 we have suggested what one might look for in a good relationship manager. You could use the outputs from your event to develop similar skill-set attributes. That said, at your event it might be a good idea to make your primary focus developing an understanding of team competence, as it is a team that performs the network management role. Whilst there is a need to identify the personal attributes of team members, the above is included on the principle that, though the attribute is individual, it is deployed by the individual for the benefit of the team.

Conclusions

The notion of developing a competence framework, as outlined here, is centred on team capabilities (as discussed in Chapter 6). To build on what we have suggested you could ask yourself how your organization’s teams should perform various procurement roles in your inter-organizational networks. We suggest this as it may help you to move away from the humdrum silo mentality of many procurement organizations, where the needs of individuals to perform their jobs within their function are considered paramount.

Table 11.2: Desired relationship management behaviours

Relationship Management

Developed relationship skill set:

Builds and maintains both formal and informal relationships.

Identifies relationship ‘gaps’ – and establishes direct relationships as appropriate.

Assesses the quality of relations, and takes any necessary steps to improve them.

Establishes effective communication channels.

Maintains contact with other network players, has regular informal contact with key individuals.

Knows how to demonstrate commitment and is willing to put in discretionary effort.

Predicts and deals with sources and causes of conflict.

Deploys excellent consultation skills.

Is able to be inclusive and build consensus.

Is persuasive.

Is skilled at chairing/managing meetings.

Foundational relationship skill set:

Able to form and maintain relationships with people at all levels.

Confident with aggressive/difficult people.

Able to remain calm under pressure.

Able and willing to challenge others without being confrontational.

Able to deal with resistance and diffuse a difficult situation.

Demonstrates tact and diplomacy.

Is good at listening.

Avoids complacency.

A good communicator (in writing and orally; in formal and informal settings).

We feel with some degree of confidence that teams wishing to be top performers need to promote continuous learning at the organization, team and individual levels because this will directly impact the shared conceptions of effective performance across the business and how it can be achieved.

Thinking about the future

Background

Running workshops on visioning how procurement might change has proved extremely valuable to us in our work. These sessions tend to be highly productive. Why they are so useful stems from the fact that the profession has evolved and that the strategic role of purchasing and supplymanagement is now well established. People often work ‘head down, butt up’ and change tends to pass them by. So providing the time for an opportunity to think and discuss this change is a very good use of time.

Regarding the evolution of procurement and its now well-documented increased importance to the organization there were concerns voiced that if it were unable to meet the new demands of the organization – be they an embedded role or, more importantly, a fully ‘commercial’ arm of theorganization – then it might disappear altogether. This was a very real concern and is reflected in the issues detailed below.

You could develop your event/session to start an ongoing process. The outputs from the event(s) could be utilized across your organization as part of a PR and awareness-raising strategy as well as a method of seeking the opinions of other professionals in your organization who are well placed to provide first-hand experience and issues-recognition regarding the needs of the business and how all parts can become better aligned to the corporate goal.

Below we outline some of the (more dominant) cross-cutting themes derived from writing this book, which you will recognize from your journey through it.

Skills and abilities

One of the chief concerns we have encountered relates to the scarcity of talented procurement staff. The perceived lack of knowledge and understanding here relates to general business acumen as well as knowledge of specific markets and sectors.

There seems to be a perennial debate around the need for procurement people to develop the qualitative/social (soft) skills. These are perceived to be a prerequisite in business and particularly those associated with relationship management, eg communication, collaboration, co-dependence and influencing. So strong was this message that we have dedicated it as a theme on its own below.

Specific skill requirements highlighted through our work included the desire for risk ‘gurus’ and visionaries. The need for commercial skills featured prominently too, as did flexibility, agility and resilience. There was also a heavy emphasis on the more quantitative/scientific skills. There is a real and immediate need for people who are able to analyse data to demonstrate quantitative skills and be competent in developing and deriving solutions from data sets. We call this the bimodal procurement professional.

A new definition of expert is required: people need to be students of the industry, sector, geography, and products and services that they are dealing with.

Evolution and organizational change

An examination of this theme from the book reflects the need for organizations to consider the profound change we have experienced since the mid-1980s; and the development of new business models and formats need to be considered as a result.

There are clearly organizations that need to be convinced of the worth of a total value outlook, as opposed to one centred on cost. Total value is a far more holistic approach. People development within organizations must be seen as an ongoing process for all from board members and senior management, to front-line staff. The organizational changes referred to above will only come about through lifelong learning.

Consideration ought to be given to the increased use of technology and how the more tactical aspects of procurement operations are increasingly outsourced to third-party service providers. A focus on exactly what can and cannot be outsourced in the future should be debated. For example, businesses might want to consider a loose network versus a tight function for the organization – which of these makes commercial sense.

Other consideration can be given to the likelihood of procurement and supply management becoming embedded in other strategic parts of the business as a fully integrated part of them, and the profound need for a strong commercial focus.

What could happen at the most senior end of the profession as the aspiration to be on the board remains? Will we see a Chief ProcurementSupply, or even Commercial Officer?

What might the function look like? Smaller, value-adding, with a broader remit, dealing with ‘externalities’ – all are topics that are relevant and open for discussion. What are the boundaries of procurement‘s ‘territory’? Will procurement have cross-functional accountability and governance for supply chain – perhaps jointly owned? How will it manage relationships with increasingly dominant outsourcing providers – the notion of ‘buying’ buying?

Relationships

We have seen a very heavy emphasis placed on procurement‘s role in relationships: their nature – commercial or otherwise; their management; and their importance. Whilst supplier relationship management (SRM) is a perennial issue for procurement it is one that for many reasons – assurance of supply being the most critical – is one that procurement must master. Collaborations, co-dependence, interdependence and the changes in the balance of power – be it between East and West, the buyer and the supplier, or third-party service organizations: relationships are key to the value that procurement brings to the business it serves.

Collaboration

This is seen as the ‘new’ way, with the old adversarial relationships being outmoded and inappropriate. There is a new challenge for procurement to become an intelligent customer, the buyer of choice.

Risk

Risk awareness and whole supply chain insights have become aspects of the daily activity of those working in the procurement, and this is a clear value-adding aspect of the role. The notion of risk managers with ‘guruesque’ knowledge of your supply network and a mature understanding of both the opportunity and threat presented by risk scenarios are becoming de rigeur. Nowhere will this be more prevalent than in the area of outsourcing (of tactical procurement), where service providers will gain power and the risk associated with this will need clinical management.

Commercial focus

There is no doubt that the level of sophistication in procurement today is set to increase even more. Nowhere is this more apparent than the commercial focus anticipated by organizations from their procurement and supply management professionals.

As the strategic scope of procurement broadens and its capabilities are increasingly recognized within organizations – it will have an increasingly financial (commercial) focus. The management of the legal/contracting base to affect consortia and greater interdependencies will demand a commercial mindset and mastery of acquisition as well as procurement know-how.

Messages for your business

The future of purchasing and supply should be an issue of concern to you as a procurement professional, and to your business. The global nature of business and markets means that in different geographies and cultures different things will be important; there will be development ofdifferent ways of doing things well, many of which will not have been exposed to us yet. Embedded procurement, transferable tool kits and skill sets could be the end of the dedicated discrete function that procurement has been for some time.

The issues and themes we have identified above are clearly not the only areas of interest that could be or should be raised in a workshop or event – they are simply the most prevalent from our perspective. You might suggest that a group should be formed that will shape the future within purchasing and supply in your organization. This group might be responsible for recommending future paths, moving the debate forward, giving clear and distinct priorities regarding the discipline to the wider business. Whatever you choose to do, an open forum for discussion regarding the future of procurement is of value to the wider business.

Setting up your own event

At www.koganpage.com/pvp we show how to set up an event in your organization or team to establish a debate regarding visioning. This is not meant to be prescriptive, merely a guide to set the debate going.

Please go to www.koganpage.com/pvp for a full set of PowerPoint slides covering the visioning innovation debate.

Dealing with 21st-century risk

Background

Given the changes we have experienced throughout the world of business in the last decade, we feel it would be interesting to consider the following question in the context of contemporary procurement and supply chain management: taking into consideration globalization, increased logistics costs, increasing levels of risk and rising labour costs, could it be time for a ‘practice product’ recall?

It is a fair question. Where will future global sourcing benefits come from given the foregoing? Should we be considering ’embedded procurement‘, by which we mean something that is locally embedded – allied to our giving serious consideration to the limits of global sourcing strategies?

In this book we have focused on procurement and supply chain management. As we wrote at the beginning of Chapter 1, this is a subject that was unheard of in the 1970s and has now become a strategic imperative to all organizations. Supply chain/supply management as a concept was born at the beginning of the 1980s. If we look back at the early concepts and developments some of the associated trends are easy to spot:

  • The 1980s was about the demands of just-in-time.

  • The 1990s was all about outsourcing.

  • The 2000s saw the emergence of the internet and e-solutions.

  • The 2010s thus far has been about supply chain risk (benefits + impediments).

The last 30 plus years have shaped the business situation in which companies now find themselves – via globalization and rapid developments in the new information technologies. Dealing with ‘wicked problems’ – the unanticipated outcomes of the implementation of new ideas – has made the need for the proper management of the supply chain in its entirety fundamental for all organizations to survive in the business world.

So let’s consider a few of these issues and how they might impact modern supply chain design:

  • Globalization: an old force but one that will continue to develop producing longer and longer lead times and demanding the constant attention of the CEO.

  • Increasing logistics costs: transportation costs continue to rise due to rising energy prices and, with greater global consumption, inventories have risen too.

  • Increased levels of riskthe consequential ‘wicked problems’ of embracing strategies such as lean manufacturing, outsourcing and offshoring without consideration of any possible draw backs from this activity.

  • Rising labour costs: low-cost countries were only ever a one-hit opportunity. Globalization has been happening for some 20 years. In China, local labour costs have increased on average by 20 per cent year on year.

  • The focus on sustainability: once considered a fad, now Europe leads the world in developing green supply chains.

  • The increasing volatility of commodity prices: potentially fatal for some organizations. Think airlines procuring fuel – do you go long or short term? How do you out-guess the market?

Whilst the sourcing dreams of globalized markets are obvious – such as bottom-line improvements, new capabilities, access to new markets and so on – it is the sourcing nightmares that keep CEOs and CPOs awake at night. Were the supply chain calamities from the earthquake in Japan predictable? Are we living beyond risk mitigation and living in a business world where risk must be weighed up on its probability and not our ability to avoid it? Do we need to think about risk and rational, regional, practical supply chains?

Folklore has it that Henry Ford could get the customer any type of Model T as long as it was black; and yet, as a consequence of the disaster in north-east Japan the Ford Motor Company found itself in the strange position of being able to supply vehicles in any colour except (metallic) black as a result of the catastrophe.

The earthquake and tsunami that hit north-east Japan rocked global supply chains – and who knew that so much of the world’s production could be so devastated by disruption from a single region? So how did this vulnerability come about?

A trend that started in the automotive industry in the 1990s has become the norm across pretty much the whole industrial world: a radical supply model that outsourced, offshored and ‘single sourced’ from a single suppler often at a single plant – thought to be the cheapest location in theworld.

It was in the mid-1990s that Inaki Lopez, who worked at GM and then VW, launched this revolution in automotive supply chains: because a revolution was needed at that time. Original equipment manufacturer (OEM) supplier relations in the automotive industry were often too cosy and OEMs had so many suppliers they could barely identify them all. So businesses began to seek the lowest ‘global piece price’.

Additionally, tooling costs were saved by establishing capacity at only one supplier location. All previous considerations of how parts related to operations were dispensed with. The buyer–seller relationships vanished – but sensible considerations such as total cost, quality, logistics and partnering for mutual prosperity also disappeared too. Before long, even internal operations were held to the same pricing standards, and business process outsourcing grew along with offshoring. The rationale was that if you couldn’t price match those from China/India/Brazil, then thebusiness would put that aspect of work out for bids. This led to a rash of bankruptcies. First, smaller suppliers closed their doors (at huge cost to OEMs), to replace the lost supply of parts and materials. They were followed by larger ones. As a result, procurementsupply management and logistics became increasingly complex.

Other trends contributed too: more sophisticated software and transportation systems, for example, led to the rise of ‘3PL’ specialists. Logistics and even supply chain strategy also became outsourced in the rush to reduce costs – and outsourcing begat outsourcing. In the end, yet another key competence of manufacturers was lost to specialists whose interests were their own, not the OEM’s, and most certainly not the customer’s.

That said, there is nothing inherently wrong with sourcing globally. But a single-minded focus on lowest piece-price with no regard to broader strategies leads to unneeded complexities; and, as we see from the example of the natural disaster that befell north-east Japan, unneeded and unanticipated risk.

The simplistic and predictable reaction might be to question just-in-time (JIT). But this is not the real issue here; the real issue is to question supply chain strategy and configurations. Sourcing from far-flung global locations high-cost modular componentry that quickly loses value every day it sits in the distribution system has become the industry norm. The catastrophe in Japan meant that organizations that operated on minimal buffer stocks contemplated operating with increased production and more stock, increasing buffer stocks or finished goods inventory to protect themselves in some cases against a 100-year interruption. This can only be seen as absurd.

‘Tuxedo black’ is Ford’s name for a colour that is dependent on a unique pigment from a Merck plant close to the Fukushima Daiichi nuclear plant. At the time of the disaster it was not produced anywhere else in the world. Merck said at the time that the plant itself wasn’t damaged but, due to radiation, engineers couldn’t even re-enter the plant and that when they could it would take months to set things back in order and begin producing zirallic, Merck’s name for the pigment.

The deeper problem is that most companies still don’t know the full extent of their exposure to risk. Buyers know their suppliers, but usually not their suppliers’ suppliers, or the suppliers of those suppliers – think of recent issues and dilemmas over child labour, unsafe buildings, counterfeit components and foodstuff etc.

Clearly the solution isn’t just a matter of exiting areas of the globe that we now consider, for whatever reason, to be risky. Rather, the solution lies in rethinking how we design and operate our supply chains. In general, it makes absolute sense to produce close to where one sells; and in general it makes most sense to engineer close to where one produces. And it certainly makes most sense to procure as close as possible to where one produces for one’s customers.

At the beginning of this section we asked if it is time to bring to an end 20 years of antithetical sourcing strategies. Single sourcing is dangerous – that much is obvious. Moreover, 100 sources all competing for the next contract based on piece price is also dangerous, but in a different way. When that single source is continents away from production facilities, the danger is naturally magnified.

A new sourcing model is needed in this decade of increased risk. The wisdom of ‘dual supplier’ strategies of many lean-thinking supply chain managers is clear – avoid both single source and ‘numerous sources’ situations. When W Edwards Deming advocated what he called ‘single sourcing’ he was promoting OEM–supplier relationships based on partnership, not zero-sum negotiation; and on cost of quality, not price of transaction. Toyota’s traditional approach was to pursue dual sourcing for first- and second-tier suppliers. Unfortunately this did not always extend to often small third- and fourth-tier suppliers – thus Toyota especially suffered in the global supply crisis, as 80 per cent of its in-vehicle computer chips were being supplied by one facility in north-east Japan with no easy re-sourcing possible.

Anyone, anywhere, who wants their country to be a competitive manufacturing location needs to practise ‘lean’. That is, total cost including the potential cost of disruption on long-distance supply chains (see the simple economic value model in Chapter 2) rather than the piece price, plus slow freight-cost calculation done by most manufacturing firms today. We know that in continental Europe, especially Germany and France, there exists a much more ‘competitive’ manufacturing location than most procurement managers seem to think, based on the continuing decisions to send manufacturing to locations far and wide. Moreover, China has visited Europe recently to invest in it.

Caution needs to be exercised here because any costing model will be based on assumptions, and while risk can be factored in, no risk model could have ever accounted for the disruption that began on 11 March 2011 after the Tōhoku earthquake and tsunami. It is far more practical to work from some simple principles of lean supply chain configuration, for example shorter lead times are better than long. Closer proximity between suppliers and customers is better – shipping regionally is better than shipping across vast and sometimes troubled oceans. Fewer inventories with more frequent delivery are better than large inventories that move infrequently. Single sourcing, especially single location sourcing, is generally bad – it is risky and doesn’t leverage natural, healthy competition. Maintaining hundreds of suppliers for the same component is also bad – it generates complexity, confusion and costs of redundancy.

No one with a ‘value-add’ procurement mindset would challenge the concept of adopting a total cost view; so it is more than simple resistance to the basic idea that is the problem. Rather, companies are simply inexpert when it comes to executing a true total-cost strategy. As costs are broken down and allocated across functional lines, ownership and even understanding increasingly become murky.

Recent research by Holger Schiele and others has shown that buyers who want to shift sourcing from Europe to China fail to consider plenitudes of costs and consequences. Good-quality metal can cost more in China than in Europe (see Shanghai Metal Index versus London Metal Exchange).[2] Energy costs more in parts of China than in parts of the United States and Europe; and what about the time and cost of managers travelling to visit global locations, along with the communication challenges of late-night conference calls with difficulty understanding those on the other end of the phone? In the face of all this, one might ask what reductions in total cost could be realized if the time, effort and energy of sourcing across the planet were actually invested in the local supplier through kaizen?

The point here, to repeat for emphasis, is not that sourcing in China or Brazil is a bad idea – the emergence of China and Brazil as viable sources for the global production community is a positive phenomenon of historical importance. However, each sourcing decision needs to be made on its own merits. Or else we are perpetuating the risky nature of procurement when we could be using sound procurement knowledge and business skills to work with the positive aspects of risk.

So, in conclusion, in preparing for a workshop on working with risk in a 21st-century supply chain, what might you pull together to set up the debate? You could start with the position that lean thinking brings things together, and emphasize the connectedness of all parts, organizationally and physically, namely suppliers that are close to OEMs that are close to customers.

Clearly it is no easy task to unravel the complexity of 20 years of piece price optimization. But there is no harm in going back to the basics of starting with the customer, defining value and working backwards from there. Working together we can create supply chains that flow value from raw material to the customer with ever-shortening lead times, profiting both OEMs and suppliers.

Just as JIT is not the practice to challenge here, neither is the practice of sourcing globally. The problem is far greater than being unable to order your vehicle in tuxedo black. Sometimes we need a crisis to spark transformation. Now is the time to rethink and reconfigure supply chains so they are rational, regional, practical, low in total cost and risk, and high in fostering quality – in short, lean, yet risk-aware supply chains.

Setting up your own event

At www.koganpage.com/pvp we set out how to set up an event in your organization or team to establish a debate regarding risk issues in the 21st century. Once again, this is not meant to be prescriptive, merely a guide to set the debate going.

Please go to www.koganpage.com/pvp for a full set of PowerPoint slides covering the risk innovation debate.

Sustainable procurement

Background

A major challenge to procurement is the rapidly rising interest in sustainability. The age of the ‘triple bottom line’ is upon us, where the assumption is that profit should no longer be at the expense of people (the social dimension) and planet (the environmental dimension). The pressure is mounting on business to deliver economic returns from greener goods, and corporate social responsibility (CSR) is no longer something that can be dismissed as a fad for environmental fanatics or ‘tree huggers’. The planet’s resources are in decline and the climate is changing, placing increasing pressures on companies to reduce carbon emissions, recycle or reuse, and to develop green technologies. Sustainable development is here to stay and only shows signs of gaining even greater momentum for the foreseeable future.

In today’s business world we face an array of difficulties whose scope and complexity can make them intractable. Sustainability has become a burning issue to all in business. And yet if we think carefully through the trends affecting procurement and supply chain management today, and focus on using resources productively, sustainability needn’t be one of these difficulties.

As the boundaries of our economy expand, we become ever more reliant on longer and more complex supply chains. As a consequence we see the debate becoming more complicated, especially around sustainable procurement, and never has it been more important for us to understand what is going on, why it happens and what works in a commercial environment.

Where once these discussions centred on the need for green or ethical practices – instigated by CSR policies – things have moved on. The impact of the 2011 tragedy and ongoing crisis in Japan has brought home what many had already started to realize: that without robust sustainable procurement practices, many organizations are in danger of severe disruptions to their business.

Managers are increasingly looking to improve the social and environmental impacts of their supply chains but say they feel blocked by forces beyond their control. Efforts to boost the sustainability of supply chains are hampered by cost, complexity, lack of information and know-how, and the sense that some of their principal stakeholders are not deeply concerned about the issue. Many sceptics focus on financial factors. This may be a response largely due to the weak economy. It also shows that people are not convinced by academics, consultants and others who argue that improving sustainability will not necessarily cut into profits, and may in fact help the bottom line. And yet it seems that a consensus of opinion reflects concern about sustainability and supply chain performance.

Sustainable procurement takes into account a range of environmental, social and economic consequences of a whole range of production methods and services such as design, non-renewable material use, manufacturing processes, service delivery, logistics and transportation options, maintenance, recycling and disposal, and not forgetting each tier of the supplier base. The driver is not ‘just’ CSR any more, but a range of influences from statutory, through to political and social, and of course commercial. Implementing processes that truly meet the demands of good sustainable procurement practice means that each level of supplier is required to do the same.

There are four core areas that impact on the sustainable debate. These are:

  • Ethical and sustainable trading: where once it seemed the world had unlimited resources, now it is all too obvious that increasing populations and ecological challenges means the world is no longer able to replenish those valuable resources.

    To date, retailers and other directly consumer-facing businesses have borne the brunt of societal and business scrutiny, with criticism of unethical employment practices amongst suppliers hitting the headlines for companies such as Primark and Nike. Not understanding how suppliers conduct their business can lead to reputational damage that is hard to shake off, and increasingly business customers as well as consumers are looking deeper into the provenance of products.

  • Waste: landfill is no longer an option and costs of disposal are increasingly expensive. By cutting waste, production costs are reduced and processes become more streamlined.

  • Carbon emissions: according to the Carbon Disclosure Project supply chain report 2011, 50 per cent of an average organization’s emissions come from the supply chain. So, if organizations do not put their house in order, they will soon be forced to by legislation. For instance, the Carbon Reduction Commitment’s Energy Efficient Scheme in the UK is the first mandatory carbon trading scheme and targets those producing higher emissions.

  • Energy use: declining reserves of fossil fuels, and rising costs of those fuels, means that everyone has the responsibility to make best use of those resources.

Though the frequency of dialogue around sustainable procurement is increasing, the activity itself is not new. Sustainability goals can be met merely through adhering to good and efficient procurement practices. Those organizations that have these practices in place will harvest thebenefits of future-proof efficient supply chains. Those that don’t will be exposed to the catastrophes and unpredictable forces outside their control.

Mitigating the risk of supply chain failures and fluctuating prices for raw materials, and being aware of political, environmental and cultural changes in the global environment, gives businesses an advantage. Those businesses putting sustainability at the top of their corporate agenda will have a competitive advantage, as well as an increased chance of survival when the going gets really tough. It also helps businesses to attract the best staff possible, with candidates increasingly looking to work for organizations with the highest ethical and sustainability standards.

Many organizations have already understood this message and are making proactive efforts to protect their businesses and the environment. Young’s Seafood recognized the effect that unsustainable fishing would have on any long-term goals, as fish stocks dwindled and the quality ofthose catches plummeted. Their implementation of the ‘Fish for Life’ sustainable fish procurement policy made several demands of their suppliers to provide evidence of adherence to strict management protocols approved by Young’s, as well as showing a commitment to constant improvement.

By making these demands themselves, Young’s found that their own business also had to change, and they had to implement some key developments. They stopped purchasing North Sea cod because of the poor condition of fish stocks. Their obligations also developed into other areas of the business, such as policy, where they lobbied for more robust management of European fisheries – so their sustainable approach has far-reaching consequences.

Adnams, the Suffolk brewer, took something that started as an impetus for a CSR policy and developed it into a cost-saving initiative. Their lightweight bottles saved on raw materials and eventually transportation costs, as the lighter-weight bottles took less energy to deliver. Their East Green beer, marketed as ‘the first carbon-neutral beer produced in the UK’, uses locally produced high-yield quality barley. Their choice of hops is a variety that is more pest-resistant, reducing the need for chemicals, and so protecting the environment and reducing costs. Their energy-efficient brewing methods have enhanced their brand, as well as any promise that remaining CO2 emissions will be offset.

All in all, businesses must have a positive impact on people, profit and the planet: the ‘triple bottom line’. The need to measure and prove effectiveness, and the influence of sustainable procurement, is vital. For this reason, the CIPS Sustainable Procurement Review tool was recently launched, to enable businesses to measure the sustainability of their supply chain and for suppliers to demonstrate this to customers. The tool helps to benchmark purchasing performance and progress towards putting sustainable procurement at the heart of their organizations and in understanding their own standards and procedures across all aspects of environmental, social and economic policy.

Procurement and supply chain management professionals have a huge role to play in how this debate rumbles on. Supply chains are a key component in organization structure and so influence the health of every economy. A recent survey of our members found that 55 per cent now have a sustainability policy, with the pressure from public sector customers and stakeholders being the most popular reason as to why one was implemented. One in five stated that their driver was the need to conserve natural resources. Procurement professionals are increasingly aware of thebenefits of sustainable procurement, not just to meet the needs of regulations, but as a strategic contributor in planning for future innovation and profit.

In the global economy, businesses are becoming much sharper at developing and coordinating suppliers in the battle for sustainability. Sustainable procurement is a commercial necessity, not a diversion, but of course has wider benefits to the environment and communities across theglobe. Those who ignore this increasingly risk being left behind. The message is: become sustainable or go out of business.

Sustainability presents a risk to companies that are unprepared for it, but also an opportunity for companies willing to embrace the challenge. But companies cannot tackle sustainability by themselves: implementing sustainability requires systemic change, especially radically overhauled supply models. Paradoxically, the trend towards outsourcing, particularly to low-cost countries such as China or India, has exacerbated the sustainable procurement and supply chain management challenge. One of the negative results of global sourcing has been that companies have lost sight of what goes on within their extended supply chains – and low-cost country sourcing sometimes comes at an unexpected price.

Consider for one moment the problems of the BP oil spill in the Gulf of Mexico in 2010: it shows that companies cannot simply blame their suppliers when environmental disasters happen in the supply chain. Similarly, the collapse of a garment factory in Bangladesh in April 2013 killing over 1,100 factory workers; this was a supplier of Western fashion companies and retailers looking for low-cost sourcing. Companies such as IKEA and Apple have had to completely rethink their purchasing strategies due to damaging reports of ethical sourcing problems such as the use of child labour and suicides in supplier factories.

Again, a key message of this book is that a company is no more sustainable than the suppliers it sources from, putting purchasing right at the heart of sustainability implementation. New innovative purchasing strategies and methods are required not only to avoid the risks of unethical purchasing, but also to fully take advantage of the opportunities posed by sustainability.

Should there be a sustainability shake-up?

Are you thinking about the next generation of sustainability-focused procurement professionals? Is your aim to alter the way business is done in every function and unit of the business?

Today’s successful sustainability-focused procurement executives are pushing the boundaries of their job description, budget constraints and the limits of ‘moral influence’. Their goal is simple: to alter the way business is done in every function and unit of the company. Their motivation: theimplementation of shared organizational and social values.

From the organizations that we spoke to, it was apparent that procurement executives are frequently leading via provocative measures that help functional managers to identify their own opportunities to improve corporate social and environmental performance with their range of influence. This drives sustainability consciousness down to lower organizational levels, embedding it in the company culture and organizational processes. Through a form of ‘acculturation’, sustainability moves from ‘personality-focused’ to process driven – and the creation of organizational routines that stick.

When procurement lead on this issue they typically work at identifying like-minded allies in key functional positions and persuading them that it is in their own interest to take action by demonstrating the value in sustainability. They help managers to find value by ‘commercializing social value‘ into their individual business decisions. Social value is an important corporate asset gained by relating with key stakeholder constituencies.

Social intelligence as a business asset

Traditionally sustainability initiatives have been externally focused, with the bulk of managers’ time spent communicating initiatives and reducing the company’s carbon footprint. Social intelligence is a valuable corporate asset. Knowledge of the millennial generation’s greater expectations about social responsibility, for instance, can be key in attracting, motivating and retaining the next generation of employees.

Understanding activist and shareholder demands for transparency in political contributions can avoid damaging revelations about your company’s lobbying policies. Insights into indigenous rights issues when making raw-material sourcing decisions can help to avoid potential conflicts, supply disruptions or reputational risks.

Social intelligence is gained through relating with influential stakeholders and, more importantly, it is recognizing that social intelligence is most valuable when it enhances day-to-day business decision-making – and this is key. Inaction on sustainability initiatives often stems not from a lack of interest among functional managers, but a failure to demonstrate the business value of applying social intelligence to decision processes. Implementation often follows quickly after the value is understood.

Fortunately, it is not a difficult challenge; we all read the papers or talk with our neighbours and co-workers to share our experiences, concerns and hopes for the future. Through this habit we obtain and share social intelligence, which we use to make decisions, such as choosing what car to drive, what school to attend or who to vote for.

Unfortunately, while business managers are encouraged to use ‘commercial intelligence’ in business decision-making, most leave their ‘social intelligence’ behind when they arrive at work. Maximizing the benefits of social intelligence requires that your actions are not haphazard, but guided by an overarching sustainability vision and strategy. To achieve this, and lead sustainability via procurement, you need to rethink the role of procurement.

This recent trend towards sustainability is by no means purely a theoretical phenomenon. National governments and international bodies such as the European Union (EU) and World Trade Organization (WTO) are debating the sustainability challenge facing the global economy and putting into place ambitious targets and action plans. Companies across all industry sectors must adapt to a rapidly changing world in which the need for sustainable economic, environmental and social development is at the core. Many companies have made significant changes to theway they operate, fully embracing the sustainability challenge, but others still view sustainability as something that does not really concern them and might ‘go away’ in the next few years.

The future of sustainable purchasing and supply management simply cannot be viewed as a fad, a transient phenomenon, because the world is running out of natural resources whilst the world population keeps growing rapidly. So, there is no choice but for the whole world to become much more sustainable.

It is by no means a certainty that procurement will play a central role in creating sustainable business models. However, as we have pointed out throughout this book, businesses are increasingly reliant on their supply chains for production of the products and services they market to their customers. Thus, procurement managers are in an important position to make these sustainability changes happen.

Sustainability must avoid becoming the responsibility of a few more or less isolated individuals within companies; instead it is important that it become integrated into each company’s fabric: all their processes, including purchasing and supply chain management, should take into account the need for sustainability.

If procurement leaders and managers are to embrace this challenge they have to change the way they operate. This requires new ways of thinking about supply structures and processes and new skills and competencies. It follows that sustainability is not the responsibility of a few sustainability experts but a challenge that must be embraced business-wide.

On this and other issues addressed here, we hope that this book will play its small part in not only educating, but also changing the mindsets of current and future procurement professionals.

[2]Schiele, H, Hoffmann, P and Reichenbachs, M (2011) How to Manage Strategic Supply Risk: A Preferred Customer Perspective, Proceedings of IPSERA; see also: Schiele, H, Pulles, N and Veldman, J (2011) Recognizing Innovative Suppliers: Empirical Study of the Antecedents ofInnovative Suppliers within the Buyer–Supplier Relationship, Proceedings of IPSERA.

Notes

 

  1. The Chatham House Rule: anyone who comes to the meeting is free to use information from the discussion, but must not reveal who made any comment. It is designed to increase openness of discussion.

  2. Schiele, H, Hoffmann, P and Reichenbachs, M (2011) How to Manage Strategic Supply Risk: A Preferred Customer Perspective, Proceedings of IPSERA; see also: Schiele, H, Pulles, N and Veldman, J (2011) Recognizing Innovative Suppliers: Empirical Study of the Antecedents of Innovative Suppliers within the Buyer–Supplier Relationship, Proceedings of IPSERA.