Happy Holidays From The Mpower Group

Testing the Theory that “Sourcing is Dead”

Today’s post is from Dr. Lowell Yarusso, Senior Vice-President, Talent Management, of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

My, how time flies when you’re having fun!  It’s been a while since I posted my thoughts on how Kuhn’s The Structure of Scientific Revolutions could inform the discussion about the “Death of Sourcing”.  In today’s blog, I want to take a look at what how, over the past twenty-five years, we may have been our own worst enemies.  As I do so, the focus of my comments will be on how the way we have chosen to think about Strategic Sourcing has influenced what we have done to demonstrate its value.

Let’s start with a sports analogy.  Growing up, I was a football fan.  One of the things I noticed along the way, and it still seems to be true, was the tendency for new approaches, whether to offensive or defensive play, are always touted as the death knell for the other side of the ball.  For example, when the Shotgun formation was first introduced (By the San Francisco Forty-niner, if memory serves me right), there were stories all over the place, i.e., In the two newspapers I read (Hey, the internet wasn’t even a brainchild yet!) about how “No one” could stop that new offensive formation.  Then, someone looked, not at the results the new formation achieved, but at the underlying structure of the offense.  Viola!  It’s now just a standard option that no defense particularly fears.  The same has happened to the 3-4 defense, the wishbone offense, the Cover 2 defense, and so on.  Whether you’re coaching football or coaching a sourcing team, stagnation is just another word for losing. 

So, what does that tell us about Strategic Sourcing?  By and large, we have been focused on evaluating results, i.e., the effectiveness of efforts to apply the Strategic Sourcing process, and have pretty much ignored the question of the underlying structure, i.e., the effectiveness of the Strategic Sourcing theory.  I believe that has led us to a false sense of comfort that we had developed an approach and process that were so powerful there was nothing left to do but execute.  (The ongoing efforts to evolve the Strategic Sourcing Maturity Model are, in large measure, a good indication that we did not have it right at the outset.)

What we failed to consider was the possibility that the underlying structure has flaws that, while we focused on results, were largely hidden.  That led us to avoid the messy business of thinking through our assumptions and their implications, i.e., of evaluating the theory upon which the process was built.  To Kuhn’s point, our apparent success in solving problems of the type, “How do I reduce the price for goods/services?” and, later, “How do I reduce the total cost of goods/services?”, led us to accept the theory without question.  Recently, there has been a subtle shift in emphasis to problems that are more of the type, “How do I create value across the enterprise?”  And, with this continuing evolution of the nature of the questions we face a realization that we may be operating under a set of assumptions and a theory about sourcing that do not allow us to resolve the real issues Supply Chains face.  Again, like the football team, continually rethinking what we are doing is forced on us by the realities we face.

This is neither the time nor the place to undertake a detailed analysis of the assumptions that have informed Strategic Sourcing Theory.  However, it may be useful to undertake a short thought experiment to see what such an analysis may reveal.  One assumption we may want to test is that Strategic Sourcing must be driven by quantifiable data, i.e., that, if it can’t be measured, it can’t be managed.  The experiment is this:

Consider a sourcing event that focused on the category, “Motor Oil”.   I have a friend who sources that category on an ongoing basis.  His decision criteria focus on traditional “total cost of ownership” variables, i.e., price per quart, Mean Time to Failure, recycling costs, etc.  So far, so good.  But, what are the less obvious value drivers related to Motor Oil.  One is ease of handling.  Purchasing in gallon containers yields a lower total cost of ownership per unit (quarts) of oil used.  But, a gallon container is more difficult to handle, has a greater propensity for spillage, and, because few vehicles have a crank case that holds an even number of gallons, gallon containers lead to overfilling or underfilling as his maintenance staff try to gauge when “enough is enough”.  (The alternative is to add significant time to the oil change process to allow for careful measurement of the exact amount above an even gallon that is needed.)  And, all those partially used gallons further complicate his life.  The issue is, how does he quantify the value of buying in quarts rather than bulk containers?  The answer is, he doesn’t.  He just “knows” quarts are better than gallons and only buys in quarts.  Note, too, that this discussion assumes that the highest value approach to lubrication is motor oil, a conclusion that, as technology evolves, may not continue to be the case.  A focus on “quantifiable variables” may be totally inadequate to deal with that kind of change in the environment.

What does our “quantifiable variables” assumption say about my friend’s approach to sourcing Motor Oil?  Could he come up with a dollar value to add to the decision model?  More importantly, should he?  Or would the effort to do so be patently wasteful and unnecessary?  Of course, some would say, “so, make it a go-no-go decision criteria and be done with it.  That, however, is tantamount to saying, quantifiable variables do not capture everything we need to incorporate in our sourcing decisions.  In other words, the assumption is inadequate to the task and, therefore, the theory and the process need to be revised to accommodate the additional assumption(s) needed to cover this situation.  Or, the assumption itself is flawed and should be discarded. 

Now, I admit that this is an overly simplified example.  On the other hand, if the theory can’t handle the simple cases, how can it be considered adequate for the more complex realities of most of the categories that get run through our existing Strategic Sourcing process?  The point is a simple one.  We need to do some meta-thinking around Strategic Sourcing and not simply accept the current practice because it is current.  Kuhn, I am sure, would agree.

And, as an aside, I hope that you agree as well.  On the other hand,  I would like to do a future blog that addresses the rebuttals to my thinking.  I am sure there must be some but I’m running out of steam so I’ll ask that you help me out by sharing your reactions, whether positive or negative.

Next Practices Innovators Award – Executives Who Elevate Our Function

Next Practices Innovators are a distinct group of professionals singled out as leaders in Strategic Sourcing and Supply Chain Management.  Whether through trial-by-fire or groomed at the top universities, the executives awarded this distinction run some of the most successful supply chains in the world.  These men and women create differential value for their companies by pushing the boundaries of our function; what these men and woman are doing today, the rest of us will be aiming for in the future.  As a result of the success they bring to their companies, they have raised the level of our function immeasurably.  For that we recognize them.  The purpose of this award is to single out and take a peek into the minds of these leaders and visionaries in order to perhaps learn a few things and further the success of our own careers.

 

Lamar Chesney – Inaugural Next Practices Innovator

We are pleased to announce the inaugural Next Practices Innovator, Lamar Chesney, EVP and Chief Procurement Officer for SunTrust Bank.  Mr. Chesney is a seasoned financial professional with nearly forty years of diversified business experience as a senior executive in the financial services, manufacturing, audit services, educational, transportation, professional services, consumer products and energy industries.  His career has spanned some of the world’s finest brands including, Marsh & McLennan Companies, Mirant Corporation, Delta Air Lines, and The Coca-Cola System.

Mr. Chesney is a noted thought leader and presenter across the United States on diverse business topics.    Mr. Chesney has the further distinction of being named 2010 Keynote Speaker at Aberdeen Group’s Chief Procurement Officer (CPO) Summit.

Aberdeen’s Chief Procurement Officer Summit is the premier event for global procurement executives to learn, network, and discuss the strategies needed to extend the broad transformation of their organizations. “This year’s event offers our most comprehensive, industry-leading roster of presenters yet: true visionary thinkers and executive-level presenters who are ready to share their strategies for success,” says Andrew Boyd, President, Aberdeen Group.

TMG: Do you feel that Strategic Sourcing/Supply Chain Management (for now, we will assume they mean the same) has delivered the results that it promised over the last 25 years?

Lamar: Success can be measured by not only where one is but also how far one has come.  We have clearly come a long way from being contract specialists to a role requiring diverse technical (functional) as well as strategic (leadership) skills to align business strategies with its own supply management strategies.  Unfortunately, we still have a long way to go.  Having failed to measurably move beyond a cost focus, we have not been able to convince our stakeholders that we possess the capabilities to make a significant impact on many of their other value drivers as well.  We have spent too much energy on selling our technical proficiencies such as negotiating prowess, jockeying for “control” and conveying our worth via cost savings. This has blocked our ability to convince others that we can make a strategic contribution.  For us to be viewed as strategic, we must become thought leaders in our organizations, and convincingly demonstrate our ability to engage and contribute to business strategy development and link their value drivers to our process.  This will demonstrate creativity and action as well as strike the right balance.

TMG: What would you say has been a major part of the problem?

Lamar: I do think that because it has been predominately a cost focused process, it has not reflected the many other priorities of our stakeholders.  This is understandable but not acceptable.  Understandable because cost was and is the life line procurement grew up with as its only internal and external measure of contribution.   We continue to reinforce its importance at the expense of moving to a “value” measure.  It’s unacceptable because we have permitted ourselves to be viewed as little more than cost cutters because for the most part that is what we do. This leads to continuing frustrations manifested through the desire for (but inability to achieve) a “seat at the table”, early engagement with executive stakeholders, eliminating directed sourcing events, enhancing the diminished value of Supplier Relationship Management.  We need to change our Sourcing process to go beyond cost and focus on those value drivers that are most important to our business partners.

TMG: Has this cost focus had any un-intended consequences?

Lamar: The disproportionate focus on optimizing cost (TCO etc.) has led to sub-optimizing many other value drivers that impact the elements of importance to our stakeholders.  And they know that.  While we have started at least acknowledging the importance of risk mitigation, buyer/supplier collaboration, continuity, visibility and certainty (to name a few), that is not the same as valuing them throughout our process.  Our stakeholders know those value drivers have a measureable and meaningful contribution to their success.  That has to be our starting and ending point and it must be reflected in our metrics and decision processes.

TMG: Why are organizations not getting the desired results?

Lamar: Companies naturally measure their maturity in terms of improvements in tools, technology and processes, and people.  We in supply chain management tend to rely on the same measures.  However just like with our kids, providing a good school, the right extracurricular activities, good habits, the right friends, etc. are important but they do not, per se, ensure success.  This “foundation/infrastructure” is vital not to success but rather to permitting success; Adoption, Execution, Institutionalization, Optimization and Utilization must be present to enable success.  The investment in the “foundation/infrastructure” must be matched by a corresponding investment (budget, sponsorship, resources, etc.) in promoting the vision and values that we as a profession bring to commercial operations. I assure you that we will never be seen in a light greater than that which we shine on ourselves.

TMG: What do we need to do differently as far as our process is concerned?

Lamar: There is good news and some not so good news.  The good news is that we don’t need to discard the principles or the toolkit. They have been and continue to be of great value.  What we do need is a significant shift in the perspective, or the axis.  As I said above, the starting and end points have to be ALL of the value drivers.  From there, we can determine what we need to change in terms of our process and tools. This will take significant effort as we have “trained” our stakeholders (and ourselves) to primarily articulate cost savings as a measureable metric.

TMG: Let’s start with ourselves then.  Do we need to “train” ourselves differently?

Lamar: Yes.  First we need to change what we “train” ourselves on.  The historical view of competencies is technical, functional and managerial.  While these are critical, they must be supplemented by strategic competencies such as exerting personal influence, activating organizations, optimizing self capabilities, systemic thinking, etc.  They turn managers into leaders.  They marry strategic capability with tactical capability.

Second, we need to change how we “train”.  Achieving the right proficiency will require explicit definition of the competency, describing the behavior required to demonstrate competency and engaging in practice and feedback to refine and enhance competency proficiency.  Without this combined focus, we can never hope to be fully “capable”. Competency development requires consistent application and a support system such as ongoing coaching and mentoring.

TMG: Why are these strategic competencies often described as “soft skills” then?

Lamar: These are the critical differentiators and we short change their importance by referring to them in an inferior, intangible, or nebulous way.  To infer that technical and functional skills are harder to master than strategic competencies is intellectually insulting. These strategic competencies, as well as the “functional and technical” skills, need to be clearly defined, behaviorally delineated, and metrics need to be in place to measure their effectiveness and proficiency.  We need to manage our talent as our most critical asset.

TMG: How do we change the context and the content of our dialogue with our internal “clients” to make sure that they have a value based expectation and appreciation of our role?

Lamar: Expectations are as important as results.  Without them, one cannot meaningfully measure results.  So positively changing the context and content of our dialogue with our business partners requires that we (from the onset) change our thinking, our expectation setting, our interim measures, and our post-mortem assessments to incorporate the value drivers of our stakeholders.  If we do not think, speak and act with a consistent focus on these value drivers from commencement to conclusion, we can never expect others to see, embrace and value them.

TMG: What do we need to change about our metrics?

Lamar: Currently the metrics utilized for a Strategic Sourcing function are predominately tactical in nature such as spend under purview, percentage cost savings, etc.  These metrics perpetuate a cost focus.  If we want to change behavior and move toward a value focus, then we clearly need to change the way Strategic Sourcing is measured.  If Sourcing wants to be recognized as a value contributor to the business, then the measurement system (metrics) should be developed in collaboration with the business and focused on their value drivers.  Only then can we begin to change the conversation and begin to deliver results that are “valued” by our business partners (by the way, cost savings may continue to be a key metric for certain business lines).  The right metrics can also aid us in moving our organizations toward more systemic “Supply Chain” thinking.

TMG: How do you define the terms “Strategic Sourcing” and “Supply Chain”?

Lamar: I view the world of commodities through a life cycle lens and the cycle moves through a company’s “supply chain or value chain” of which “strategic sourcing” is a major activity engaged predominately during the early stages of the commodity life cycle.   I think we must clarify this distinction as a profession and with our stakeholders.  Only then can we incorporate “Supply chain” or systems thinking into our process and their decision making.  That will allow us to change their expectations and therefore our metrics.