Happy holidays from Waiheke Island and mikeblanchard4value.com
Happy holidays from Waiheke Island and mikeblanchard4value.com
At what cost? a blog about the unintended consequences of continually driving cost savings Year on Year from your suppliers.
Lets start with a definitions to whet the appetite;
Cost savings also known as cost reductions or ‘hard’ cost savings, are savings that directly impact the company’s bottom line (i.e. profit/loss).
In relation to procurement ; The aim of Procurement savings are to drive down procurement costs, improve supplier terms and decrease product prices. A cost-effective procurement process would help a large organization generate millions of dollars of savings every year.
What do you think ? Do you agree?
There is a very fine line when continually requesting cost savings from your suppliers year on year, especially when only focused on the input price and not Value or Total Cost of Ownership. Suppliers have to make a return on investment for their shareholders. Continually squeezing margins can drive many unintended consequences.
I have a saying that is a different take on squeezing blood out of a stone. In the context of your suppliers “If you continue to squeeze a stone with your hand what happens to your hand ? – ( It will be your hand that bleeds)!”
The Construction Industry
A great example of unintended consequences of cost out in New Zealand is the systemic issues in our construction industry. An industry’s boom / bust cycle is constantly under review. (NZ demographics for the construction industry show 90% of organisations have less than 10 employees – atypical compared to many OECD countries). For many years there has been a focus on fixed price construction at lowest cost combined with the drive to transfer as much risk as possible to the supplier. The articles below highlight the issues the big companies (10% of the industry) have had over the last few years entering liquidation or writing off millions of dollars;
In boom time liquidation should be unheard of. This is one of the unintended consequences around costs and fixed prices!
“Sometimes it costs you more to do something that it is actually worth”
Do you have any examples of when this has occurred?
Consumer demand can also driver unintended consequences and at what cost? The Global Fashion Industry was worth $2.4 trillion in 2018 with an expected growth of 5-6% Year on Year.
Consumer demand has driven a substantial growth in the fast fashion industry for cheap throw away fashion.
Andrew Morgan’s documentary The True Cost on Netflix is about the clothes we wear, the people who make them, and the impact the industry is having on our world. The price of clothing has been decreasing for decades, while the human and environmental costs have grown dramatically. Filmed all over the world, the documentary spans the brightest runways to the darkest slums, and features interviews with the world’s leading influencers including Stella McCartney, Livia Firth and Vandana Shiva, The True Cost is an unprecedented project that invites us on an eye opening journey around the world and into the lives of the many people and places behind our clothes.
The consumer driven consumption for low cost fashion items and the link to sweat shops and industrialisation of resources creates unsustainable issues on our natural resources. Also forms of modern slavery through inhumane working conditions begs the question who really pays the price for our clothing?
Modern slavery is a critical issue derived by the demand to continually cut manufacturing costs at the expense of human rights – ( humane working conditions, a fair days pay for a fair days work )
Based on a recent CIPS modern slavery workshop I co-hosted in Australia, here are some of the global modern slavery statistics taken from the globalslaveryindex.org;
Who would have thought that in the G20 counties the average person employs 40 slaves!
The Australian statistics are also quite challenging, however in response Federal Government Legislation was introduced in January 2019 ( only the second country in the world to implement modern slavery legislation). The philanthropist Andrew Forest and his wife set up Walk Free Foundation with a vision for a world free of modern slavery and human trafficking. https://www.freedomunited.org/about-us/
Australia’s Modern Slavery statistics;
Controlling costs is key to managing sustainable businesses, however driving an environment that continually puts pressures on suppliers has many negative unintended consequences. Global consumer demand and low cost not only creates irreparable environmental issues, it also builds an environment that ignores basic human rights.
A new focus on Sustainability, Value, Quality, Risk and the Total Social Cost of Ownership (TSCO) should be something that all organisations should aspire to. Procurement is one of the enablers of this focus as 40-70% of business’s expenditure is through third party suppliers.
It is time for procurement to help lead a change by doing the right thing!
Are you on board? Drive that change!
What is the cost of not?
If you have read my previous blog “Procurement is it time for a re-brand?” you will appreciate the debate that has plagued the procurement community for numerous years. For people who know me, I have always advocated in the need to put the POWER into Procurement. I thought I would have a little bit of fun ( although with some serious underlying benefits) by delivering a blog on Putting the P back into procurement.
If you are as passionate ( 1st P meaning ardent, enthusiastic, heartfelt, energetic) like me about procurement take a few minutes to think about what attributes are aligned to your values, reflects your motivations, in a profession that is far reaching, in constant change and can deliver huge value/benefits for your organisation.
Below is a small list of the P’s that put the Power into procurement. Lets get started with some examples from the list of how the P enables our procurement profession;
Proactive (definitions: Pre-emptive, active, hands-on, upbeat)
Does procurement in your organisation have insight and presents ideas and innovation to stakeholders before they know about it? How good do you know the market place, suppliers and your business goals and strategies? Procurement teams that have the “Trusted advisor status” are leading the way by managing the incipient demand of their stakeholders. It is like being an evidenced based fortune teller!
Professional (definitions: expert , proficient, specialised and qualified, certified)
How many in your procurement team understand and are qualified and certified in procurement? How many are imposters?
Lawyers, accountants, doctors, engineers, designers are just some examples of industries that have rigorous qualifications and certification. Malcolm Gladwell in “Outliers” highlighted that mastery takes 10,000 hours of practice.
When stakeholders impromptu come for advice you know they think of you as an expert.
Principled (definitions: ethics, integrity, morals, values)
Peter Drucker the management guru coined the phrase “Culture eats strategy for breakfast”. Teams that are not principled lack trust. I have had the pleasure of taking over a team that had no organisational trust. It felt at times you were walking in quicksand but like every journey of a thousand miles starts with the first step. Ethical and transparent procurement is a prerequisite for the procurement profession and without it you will not be able to deliver the basics let alone corporate value.
Planned (definitions: strategic, organised, frame, premeditated)
The edited version of the 6Ps of planning is; Proper Planning Prevents Poor Performance. This is something that all teams not only procurement should aspire too. There is much hype about agile and scrum but this is still a methodology that speeds up the planning function. My wife has an adage that I have adopted ” A dream is a goal with a timeline (deadline). Setting goals is key to any success.
Persuasive (definitions: Influencer, negotiator, diplomat)
To me persuasion is one of the key attributes for the Procurement profession. Procurement usually sits in some form of shared service , support capacity for most organisations. A key part of the role is to support the business decisions through 3rd party sourcing and engagement. How would you influence an executive if they disagreed with you about changing strategic suppliers when you know well inclusive of evidential data that they are the market leaders from quality, time and price?
So focus I have left for last is one of the top concerns for most Executive (including CPOs) are people. People can be defined as a community or group and in this form we can all attribute the word Team. The great philosopher Aristotle first coined the phrase ” the whole is greater than the sum of the parts”. In a changing world, the war on talent and capability has increased. Employing the right people with the right attitude and the right capabilities are key for most roles within an organisation. Attitude and open mindset are my key takeaways from managing teams since the age of 24. I also have a saying that if you are playing for Manchester United your transfer fee will be higher than playing for Auckland City – so how can we build a team like Man United in our profession? Have you ever been in a high performing team that has “Collaborative Confidence” everyone knows each others roles, the energy is fast pace with lots of customer delivery, satisfaction and fun.
Training and skills are essential so aligning to a global standard such as CIPS with its ethics exams and code of conduct enable people to feel confident, both from an individual, employer customer and supplier perspective.
I hope you have enjoyed this blog , along with a few smiles I am sure there are some useful takeaways
Please let me know your feedback and/or some ideas for areas you would like me to explore more deeply
“beauty is in the eye of the beholder” Margaret Wolfe Hungerford stated in her book Molly Brown in 1878.
Is value as subjective as beauty?
The classic failure to consider subjective value comes from Karl Marx the labor theory of value. Marx introduced the subjectivity of value from its objectivity based norm.
Wikapedia states that the subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends. The modern version of this theory was created independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.
The holy grail and universal challenge is how to define value. Here are a couple of definitions to help us start to view value;
Michael Porter developed a model that is used throughout the procurement industry
He moved away from organisational departments focusing his value chain on systems, and how inputs are transformed into the outputs purchased by consumers.
Simply put, all the value that is created and captured from an organisation is described as the margin. This can be defined in the following formula;
Value Created and Captured – Cost of creating that value = Margin ( mindtools.com)
Organisations are built up of formal and informal teams. Collaboration is key but how do you build consensus of what value is? The norm is to develop formulas and/or statements to enable the different groups to formulate a common understanding. Financial Management is full of formula to capture the common ground; Return on Investment (ROI), Return on Capital Employed (ROCE) to name a few ! All based on fiscal value.
However value can include, Social, Environmental, Economic , Ethical and Customer. How do we gather all these elements and deliver clarity and consensus?
There are many organisations offering tools and programs in building consensus. Below are a few examples should you want to take a further look;
Benefits realisation management as defined by the Project Management Institute is;
a “Collective set of processes and practices for identifying benefits and aligning them with formal strategy, ensuring benefits are realized as project implementation progresses and finishes, and that the benefits are sustainable—and sustained—after project implementation is complete.”
Driven from finance departments this approach was to measure outcomes of the project investments made primarily at its evolution from Capital based projects.
The project requires needs and outcomes to be developed both tangible or intangible. Once documented through stakeholder consensus a set of measurements are determined. Projects are delivered. Post implementation reviews are designed to measure the outcomes and benefits derived through a post implementation review (hence benefits realisation)
Value Procurement has been something I have been interested in for a long time. I spent 4and a half years researching supplier value.
Aas stated previously in my blog on the future of procurement and supply chain 50-70% of an organisation spend is through third party suppliers. Extracting value from this relationship is key to business success.
My research was prompted by the need to understand if there is a common set of value characteristics chosen by organisations to determine key supplier status. My aim was to uncover (if applicable) correlation between countries, tenure within procurement and determine the importance of these characteristics when entering into key supplier relationships.
Could the determination of value be influenced by culture, the market dynamics, the economic environment, individual’s drivers and motivations or the organisations objectives?
I achieved something unique, consensus (correlation) between Australia and New Zealand Public Sector Procurement Professionals. After much testing, regression testing and statistical analysis ( thank you IBM SPS tool) here is the Value model I developed;
Figure 2 Public Sector Supplier Value characteristics
This model creates insight into suppliers and their propensity to deliver value prior to entering into a contractual relationship. A great tool to help give clarity for areas of due diligence for shortlisted suppliers. The key is in how you prepare the questions embedded within the tender documentation and extrapolate their responses.
This is only one of the possible elements that derives value proven through correlation of two jurisdictions.
Porter developed a value chain methodology that is commonly used in procurement. There are many formulas that are associated with delivering value from the lens of the finance department. As illustrated with my supplier value model you can clearly see that defining value is complex.
Fundamentally Value is like beauty “in the eye of the beholder!” Gaining consensus on any definition is the key element of capturing value.
To deliver Value Procurement it is mandatory that participation in setting strategic business plans within an organisation is a priority. Sitting on the side line is not appropriate – clear participation delivering input, ideas and design is.
Enabling value through developing trust within the whole executive team is a key skills for all procurement professionals.
A trusted advisor must deliver what the stakeholder requires. Being a friction free influencer is a priority competence, however that does not always mean doing everything the exec team think they need or want. A key part of Value procurement is an advisory that mitigates risk through ethical and transparent behaviour.
Emails and phones alone cannot build a trusting relationship. Face to face, time, consistency and delivering on expectations are key elements for building trust.
What rings true here is the old adage “People buy from people they like and trust.” So how are you liked and trusted within your organisation?
What’s in a name?
“A rose by any other name would smell as sweet” would Shakespeare’s sentiment apply to procurement. Procurement for many years has been challenged by a lack of executive advocacy, influence and inclusion in strategic plans. Why is that?
Theory and Context
Everyone has their own idea of what procurement means. Is this because we all have the ability to purchase and procure in our everyday life? Buying expensive goods and services, technology, motor vehicles, even complex purchases such as property are regular occurrences for most individuals today. Purchase to pay has been commoditised due to advanced ecosystems and self-service applications. On line catalogues have opened universal access to employees to procuring goods and services. So, has this attributed to commoditising the procurement brand?
For decades procurement had been the tool to make cost savings. Organisation structures have procurement reporting to the CFO attributing to the cost saving mantra. I always attribute the CFO function and finance part of the business to the negative side of the balance sheet associated with cost containment and managing within or under budgets. How exciting would the role be if it was reporting to the Director of Sales or Marketing, responsible for revenue generation, value delivery and growth. A rarity I suspect!
The cost saving focus of the function has led to commoditisation and the misunderstanding of the role of procurement and the value it delivers as part of the organisations strategic positioning.
We are not alone!
Many other departments have had similar issues being recognised building executive advocacy, influence and being strategic. We are in the age of organisational transformation. Customer centricity has become the key focus for many organisations led by the private sector. The ability to deliver a point of difference in very competitive industries is a strategic advantage. We have even seen the emergence of the customer way (or should it be citizen) in many government agencies and departments.
Human resources have seen a massive transformation in its image and brand. A 2015 Bloomberg article cites some great examples of HR rebranding, such as Mailchimp, the email marketing service provider. The HR director assumed the title of “Chief Culture Officer.” Now, in addition to the daily operations of HR, Rebecca Greenfield and her team work on creating a culture of creativity and innovation. They utilize this new rebranding to focus on worker happiness and inclusivity, along with employee engagement and regular activities to engage workers. This a clear example of repositioning the role and function of HR.
Another example is taken from an article written by Kim, D. (2012). HR branding: How human resources can learn from product and service branding to improve attraction, selection, and retention. Cornell Hospitality Report states “HR branding can be used as a strategic tool to manage different aspects of the employment experience—from attraction, to selection, to retention—ultimately yielding higher quality and more motivated employees.
An article in the HR executive titled a “Change in the C suite” by Eva Sage-Gavin highlighted; Chief Leadership Officer and Chief Learning Officer have been in place for a while. We are seeing new roles like Chief Experience Officer and Chief Collaboration Officer emerge. Chief Culture Officer is particularly important. While some chief culture officers work within HR, others may report directly to the CEO.
Customer Service has also seen a transformation and re-brand. Experience is seen as being the key differentiator and many organisations have transformed into focusing on customer experience. Shep Hyken in his article in Forbes Customer Experience Is the New Brand states that “the race to own customer experience is on! Companies are recognising the importance of delivering an experience that makes them stand out from their competition.” This concept is not new back in 2007 in the Harvard Business review Meyer and Schwager published a paper on Understanding Customer Experience stating, “although companies have zeroed in on customer experience many have been trying to measure customer satisfaction.” They looked at and measured Customer experience management versus customer relationship management and charted a risk matrix based on a sample of high-touch customers.
The focus on Customer Experience today has seen the whole Customer Service Sector move to a rebrand with a plethora of CX conferences, knowledge, publications and consultancies.
We can’t forget IT. This sector has and still does have its challenges as technology has commoditised many of the functions. The drive for Big data (Data analytics) and the importance of decision making, and strategy being based on the insight from data has seen the traditional IT and ICT executive roles move to the title of Chief Information Officer. However today we see this at risk through the hunger to gain competitive advantage in the rapidly changing technology sectors. We now have the Internet of Things, Automated Intelligence, Robotics, Augmented Reality. The move from just technology and Infrastructure has been pervasive and so has the move to create new relevant executive roles and titles.
In March 2015 Mark Shapland in an article for the I-CIO magasine discussed the CDO v CIO (Chief Information Officer v Chief Digital Officer) landscape, commenting “As waves of digitization have swept through organizations, there has been a growing debate about the value of a new addition to the management mix: the chief digital officer (CDO)”.
Another great example of this is the overview from Gartners Partha Iyengar that the transformation owner in the enterprise is potentially moving from the traditional holders of technology.
The right Brand
It is fair to say that procurement’s time is coming! With Countries adopting the Modern Slavery Act and the focus on the General Data Protection Regulation (GDPR); management of risk will be paramount for all organisations. Not only are there hefty fines but there is also the risk of demonstrable damage to brand and reputation. If you combine this with social agenda and the rise of social procurement regulations, ethical, transparent procurement will be a strategic priority and will become one of the top 10 risks of many organisations.
Over the years I have seen many nuances on the naming and branding of procurement, here is a list for your edification;
Procurement, Procurement & Supply, Procurement & Supply Chain, Strategic Procurement, Strategic Sourcing, Strategic Sourcing & Supplier Management,
Commercial, Commercial Services, Commercial Procurement.
Do we need a name change or brand? (Procurious-Michael Page research in 2018 saw over 70% of CPO’s stating no). Does the capability of procurement practitioners constrain the opportunities and ability to gain advocacy and influence with executive leaders? For many years this has been the number one challenge for procurement. Our time in the sun is approaching, how do we as a profession grab this with both hands? Organisations such as CIPS (The Chartered Institute of Procurement and Supply) help to position our profession through a global standard and ethics charter. The chartered status ensures that you have the knowledge to assist with the strategic risks in complex supply, management of protecting people within the supply chain and mitigating risk of brand failure through unethical sourcing.
In looking for unconstrained and new branding here are just some limited ideas to wet the appetite;
Value & Acquisition, Strategic Acquisition, Ethical Sourcing, Ethical Acquisition, Value Securing, Acquisition Solutions, Social Sourcing, Strategic Supplier enablement. What do you think?
Artificial Intelligence, robotics, digitisation of tools and systems will replace the procurement and supply chain functions within many organisations over the next decade or so. There has been gloom and doom touted over the past few years for a profession that has not always been seen as a significant function within organisations.
The 2018 Deloitte CPO survey One in 5 CPO’S thought that cost reduction what is important, 54% new product development and 58% risk management.
So what has changed in the past 35 years?
Peter Kraljic developed the portfolio purchasing model (Kraljic matrix) where financial impact and supply risk were mapped into a 2 by 2 matrix articulated in 1983; “Threats of resource depletion and raw materials scarcity, political turbulence and intervention in supply markets, intensified competition and accelerating technological change have ended the days of no surprises. As dozens of companies have learned, supply and demand patterns can be upset virtually overnight.”
Looking at our world today, has this changed or are the above issues more prevalent now?
Traditionally procurement has been seen as a cost cutting and savings function in the organisation by CEOs and CFOs.
However procurement should always be seen as adding value – simply not a process or transactional function.
Letting technology do what technology does best – managing repetitive, standardised tasks is the same outcome that challenged HR, Finance and IT functions. – CPOs must create time to listen to internal / external stakeholders, be they suppliers, customers or internal peers and managers.
Paul Blake, associate director, product marketing at GEP highlighted that the Deloitte survey suggests they certainly need to make time as fewer than one in four respondents thought they were excellent business partners to their suppliers, although 86% aspired to be.
Visibility in the supply chain has also raised as a key issue. A 2017, a survey of 623 supply chain professionals across 17 countries found that achieving full visibility was a top priority – however only 6% believed their organisation had achieved it.
6% highlights a major risk lying dormant in most organisations! This presents an opportunity to turn supply chains into a proactive network where information is shared in trust for mutual benefit.
Trust requires relationship management and open and transparent supplier relationships -building trust and collaborative partnerships even with past competitors (co-opertition ) is paramount for future success and risk mitigation.
Blake stated that in the world of procurement, there is a real opportunity for CPOs to collaborate in an ecosystem of partners.
Strategically working with internal stakeholders ( customers ) is key to procurements future success. Customising value propositions, alignment to the vision, strategy , operational plans, tracking levels of satisfaction and setting targets for satisfaction” is always what procurement has been in visionary led organisations.
Centre-led not centralised ! Centre-led doesn’t infer that you can’t centralise key strategic procurement functions especially around governance, policy, standards and strategy. Embedding resources within the organisation enhances the trust and partnership of the internal relationship.
User and Customer experience “making it easy to do the right thing” is procurement’s future role and function. Tools and systems will enable delivery in simple environments. The “Procurement Value” is enabled in complex and difficult environments.
Talent, skills and competencies are key to developing a procurement function (or functions) that become the trusted advisor in our businesses.
EY in their document Infinite possibilities Procurement in 2025 stated: “Bottom line: By 2025, procurement risk management will undergo a major evolution, moving from discrete/ qualitative approaches focused on disruptions to a continuous/quantitative function integral to all sourcing and supplier management decisions”.
Most organisations have a spend of between 50-70% attributed to third party suppliers
How do you determine value form a supplier when you have no ownership? This is usually achieved in some instances through prescriptive and onerous contracts. On these occasions how often is innovation delivered?
“By 2025, the leading procurement organizations will serve as a primary channel for driving innovation ideas to/from a global supply base, and procurement professionals will play a critical role in driving new product development and evolution” EY
How do you know if the supplier has a propensity to deliver value? This is a key factor when you have never had a previous relationship with that supplier
After 4.5 years of research across New Zealand and Australia, Mike Blanchard has developed a methodology and model to help determine value characteristics from suppliers. 28 factors through research and regression testing were reduced into 6 key areas:
Paul Blake at GEP highlights all of the above in a simple statement “CPOs who embrace openness, modularity and the quality and ease of user experience – freeing up time and resource to manage the strategic challenges facing their organisation – are much better positioned to succeed”
As a CPO where are you on the continuum? Are you still dealing with too many transactional business challenges or are you really helping with the Organisations strategic plan?
Much of the inspiration for this article was taken from the Supply Management Insider and GEP paper the 5 steps to ensure that procurement has a viable future and EY’s Infinite possibilities Procurement in 2025.
Written by Mike Blanchard Chartered FCIPS, Masters in Supply Chain Management and Member of the Australian Institute of Company Directors linkedin.com/in/mike-blanchard-fcips-chartered-mscm-maicd-8734661
Thanks for joining me!
Good company in a journey makes the way seem shorter. — Izaak Walton