News U Can Use

A Supply Chain/Strategic Sourcing learning community devoted to ideas you can use in your work or daily life.

Archive for August, 2010

Old MacDonald Was Right — It Is About E-I-E-I-O!

Posted by dalipraheja on August 25, 2010

Re-posted from Sourcing Innovation

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

Most of us missed it. They were trying to tell us about it when we were very young. We were not even in nursery school yet! It’s all about the vowels. It’s not about Old MacDonald’s farm, his pigs or hens or any of that … it’s about E-I-E-I-O! Now what do vowels have to do with Sourcing and Supply Chain Management you might be wondering? Well, as it turns out … everything! The vowels are the most critical link between our alphabet and our language. Without vowels we don’t have words … we just have letters! Without words, we have no sentences, no language, no meaning, no intelligence — in short, we have nothing! And so it is in our organizations. We focus on the tools, templates, processes, systems (the farm, the pigs, the hens) and we forget about the most critical elements in achieving superior business results — the vowels. And without the vowels, all we have are letters. There is no meaning … and we add no value!

The vowels I am referring to are Adoption, Execution, Implementation, Optimization and Utilization. Without these, all we have is an organization that has the best practices, the best processes, the best tools, the best templates, etc. In other words, what we have is a Toyota. We might have an organization that may be succeeding at a large-scale, but we don’t have a sustainable model in the long run. For that, we need the vowels … the ever powerful vowels! If you were strategically sourcing a surgeon for yourself, I am sure you would look at more than just the tools that the surgeon has at her disposal and the training that she has been through. You would want to know what she could do with the tools and the training … n’est-ce pas?

And yet, sadly, it is still very hard to convince most organizations where they need to invest their focus and their energy. They all think that all they need is to develop the right infrastructure in terms of the processes, tools and templates and then train their people on the infrastructure and — voila — just wait for the results. We keep trying to tell them that they should budget at least an equal amount of effort in the vowels, including the help of an expert talent management consultancy, and they continue to insist that all they need is what Old MacDonald talked about … and that the vowels will take care of themselves. Alas, they don’t. The superior business results never materialize. The organization gets frustrated and decides that it needs to adopt new processes, tools and templates because the current processes, tools, and templates must be broken. The cycle starts all over again. And the lessons of childhood are forgotten … that’s it’s not in the verse … it’s in the chorus … it’s all about E-I-E-I-O!

And the focus on the vowels needs to start very early. After all, the alphabet does begin with an A! Furthermore, the focus cannot end with just the creation and training around the process, tools and templates. It has to extend all the way to the point where superior business results are achieved. And while we will need the best tools, templates and processes (for the infrastructure), the mere presence of, and training on, the infrastructure is clearly not enough. In order to truly achieve superior business results, we have to make sure that we pay attention to the vowels.

The focus has to be on what happens beyond the training, how people will actually achieve superior business results, and how they will successfully adopt, implement, and execute the processes. It is the same with supplier relationship management processes. It’s not how you design them, it’s how you implement them. You need to focus on how these relationships will be established and managed to extract maximum value. It’s not just about getting to the contract. At my company we believe in this so much that we even approached a couple of the major law firms to encourage them to include the vowels in their deliverables to clients when they work on executing large transactions between providers and suppliers to help set up these relationships. We did not avail, but we know we’re right. (By the way, it is the same with organizational structures. To optimize them, we have to focus on the lines [vowels] between the boxes, not only the boxes.)

Here is how the doctor described the goal of a transformational journey:

We mostly agree with this except we think the potential is even greater than that. A truly transformational Sourcing / Supply Chain department actually should be transforming other departments. They should be totally focused on value across the entire supply chain. The department should function as if it was a consulting group. The best strategy for such a department is actually a “Sunset” strategy. This concept, and others, will be discussed in later posts.

We will examine this issue in detail in a series of posts. We will begin the transformation journey together. We will discuss the use of maturity models, both current and emerging ones (which look almost identical to the current models) and talk about the gaps and the roadmaps. You can rest assured that we will not ignore the consonants (the maturity models, roadmaps, infrastructure and talent management) … but, we will also focus on the vowels (Adoption, Implementation, Execution, Optimization and Utilization). Because there’s gold in them thar vowels. We will take you back to your childhood, to the days of Old MacDonald, to E-I-E-I-O and then we will build a solution framework and challenge your thinking. We encourage you to join the conversation. Add a cluck, cluck here and a cluck, cluck there … and pretty soon we’ll have everywhere a cluck, cluck!

Thanks, Dalip.

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The Sourcing Emperor Has No Clothes!

Posted by thempowergroup on August 25, 2010

Re-posted from Sourcing Innovation

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

As we pointed out in our last post (where we killed off the old sourcing process), Strategic Sourcing has always been fundamentally flawed. It clearly did not deliver the promised results years ago and it isn’t delivering the right results today. Furthermore, I would argue that the results that Strategic Sourcing is delivering may not be totally accurate because the unintended consequences that the function creates (more on this later) may actually destroy value. The current process is penny wise and pound foolish. That’s never a strategy for long-term success. What we need is a new way of looking at this function. We need a set of next practices to elevate us beyond what current best practices recommend.

Now, there are many “defenders of the faith” who have argued, quite vehemently, that the TRUE process is not flawed; it was just never executed right. Semantics. What’s interesting is that not a single one of them has argued with our fundamental premise, that Strategic Sourcing has failed to deliver promised results and that it may have actually destroyed value along the way. I guess there’s no point in trying to change their minds as long as they agree, and they wholeheartedly do, that the traditional Strategic Sourcing process must be changed. Are you at least intrigued? Enough to at least join in the debate, regardless of which side you take?

As we alluded to in our last post, sourcing has always been focused on cost. And while cost cannot be ignored, a process that is rooted in cost cutting simply cannot be considered a strategic process for any sourcing organization. Cost has never been a long-term strategy for most corporations. I’ll put it another way. Long term growth was never achieved on the foundation of cost cutting. And while we are not trying to use scare tactics generated by recent headlines outlining the major hiccups for some of the world’s largest and most admired corporations (like Toyota, Apple, BP etc.), a significant portion of the conversation around those blunders is focused on how squeezing costs out of either the supply chain (the entire system) or just the supply base (and there is a difference) was at the root of the problems.

Cost cutting is not viewed strategically (or favorably) by the rest of the Supply Chain either. If you think otherwise, then tell me, have you asked them? This might help explain the absolutely horrendous change management issues that we have all faced as practitioners. Cost reduction is not very high on the goal sheet of any of our major internal stakeholders, other than the CFO. And if it is, it’s either there temporarily or was imposed by someone else. What your stakeholders and their stakeholders will say is that they want Exceptional Business Results (EBR) that drive long-term competitive advantage. Since the focus on cost or Total Cost of Ownership (TCO) ignores many of the other elements that contribute to EBR, it may actually be sub-optimizing the entire system. While I do understand that we have moved from the traditional three-bids-and-a-buy to using TCO calculations, risk analysis, supplier management, decision optimizing, and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards and benchmarking quartiles, it’s still not enough! Since the initial goal of the process is cutting costs, it will always be like rolling a large boulder up the devil’s staircase. We lose the argument with the entire system before we even start the conversation because they see the goal of cutting costs as a threat to the rest of those elements in their system that are contributing value towards EBR. In most cases, they are right. Most of the time, Sourcing doesn’t even know what those elements are — forget about knowing what their impact is on the EBR. This also explains why Strategic Sourcing has never been fully integrated into the Supply Chain and why many still continue to think of those two functions as separate from each other.

In addition, the argument that we proposed almost ten (10) years ago, that the sourcing process cannot be strategic and competitive differentiator if everyone else is also doing it, still holds. Think about it. We are all using basically the same process, going to the same supply base and trying to extract the same leverage using the same techniques. What we have just described is a “commoditized” process. Beating down the same suppliers that all your competitors are beating down for the same 3-5% savings just isn’t strategic. Call it something else, but it isn’t strategic!

We can continue to differentiate ourselves on the basis of improving this “commoditized” process using best practices OR we can fundamentally alter the game by using a set of next practices. We can either compete against others or we can move our organizations to competition free zones. We can either benchmark ourselves against others who are all in the “commodity” world or we can re-define the measurement system so there is no benchmark for a while. We can either move up and down the traditional TCO curve or create and relocate to a totally different value curve. We can either defend our position in existing markets or create new markets. How great would it be to get the best terms for a contract without ever needing to negotiate? That’s what I’m proposing.

There are intended consequences and unintended consequences to all Strategic Sourcing decisions. Some of these consequences have a positive impact on the overall value while others have a negative impact. Some of these are known consequences while many are unknown consequences. Since the Strategic Sourcing process is based on TCO, it often only takes into account some of the variables needed to create Exceptional Business Results. As it stands, the Strategic Sourcing process is constrained from ever incorporating all of the variables mentioned above (intended consequences, unintended consequences, positive and negative, etc.). The result, many times, is a decision that clearly optimizes at the TCO level but sub-optimizes at the system level. (Exceptional Business Results Sourcing optimizes at a systems level). Tweaking the current process with best practices will certainly give you some benefits but it will clearly not lead to any type of sustainable transformation or EBR. For that you need next practices. And over the last year, we’ve created a suite of services to help our clients capture increasing value through each step-change of the Strategic Transformation. That is the summation of our argument.

While some organizations have clearly made very good progress in elevating the role and strategic importance of the sourcing / supply chain function, I think it is safe to say that we are nowhere close to being where we all thought we were going to be by now. Wouldn’t you agree? We will also be discussing this and similar topics on our own blog, News U Can Use. Come by and weigh in on the discussion!

Thanks, Dalip!

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Apple Kickback Scandal: A Lesson in Risk Management

Posted by thempowergroup on August 24, 2010

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.

News reports that an Apple global supply manager is accused of receiving illegal kickbacks in return for providing access to inside information about Apple’s sourcing strategies reminded me of an old Baseball story.  A rookie was at the plate for his first at bat in “The Bigs”.  The umpire was one of those old timers who had seen it all.  The pitch came in on the borderline and the ump paused before making his call.  The impatient rookie quickly asked, “What was it?” The ump’s response, “Kid, it ain’t nothin’ ‘til I say it is.” The same can be said about risk.  It “ain’t nothin’ ‘til someone says it is”.

And that’s the rub.  While I’ve talked around this issue in several other blogs and articles, the Apple case focused me on it again.  The early efforts to determine where Apple went wrong seem to point out the frequent tendency to close the doors that have “Entrance” signs and to ignore the ones that say “Employee’s Only”.  Many of the comments I made in discussing employee theft (What’s in the Wheelbarrow: Theft and the Supply Chain) apply here as well.  But, more to the point, how does an employee get the opportunity to take hundreds of thousands of dollars in kickbacks without someone noticing?

Part of the problem lies in the way companies approach the issues of risk and security.  Before you can address a risk, you have to recognize that it exists.  Like the umpire said, until you put a name on it, it doesn’t exist, at least not in the sense that you can do something about it.  One of the key issues I raised re: the Barings Bank collapse (Risk Management Lessons from Barings Bank (RIP)) is the tendency to apply a “black box” mentality so long as results appear to be favorable.  In this case, I can only speculate that, if anyone asked about it at Apple, the response was something along the lines of “We made our goals; everything must be under control.”  The possibility seldom occurs to anyone that, sometimes, things are not just going better than expected; they’re going better than should be believed.

While there are lots of clues to such situations, in most cases, they seem to only become clear after the fact.  The natural assumption is that, because they were recognized after the risk was identified, no one could have seen them in time to do some risk mitigation.  That assumption is wrong.  The clues are always there and are always identifiable IF the organization takes risk management seriously and makes it a top priority, from both a leadership and a management perspective.

Leadership has to make honesty and integrity the cornerstones of the business.  Everyone, from the top down, has to make it clear that there is zero tolerance for behaviors that cross the line.  Apple’s reaction to the scandal has been vigorous and shows the right attitude at the top.  The question that I have is whether or not that same attitude has been driven down through the entire organization.  How many individuals at lower levels were more concerned about what cost goals they achieved than about how those goals were met?  Organizations need to continually and consistently talk about the values and ethics that are expected and the behaviors that will not be tolerated.  A placard on the wall proclaiming that “We are an ethical organization” quickly becomes part of the background if it is neither strongly reinforced nor vigorously applied.  That’s a leadership issue and it requires that leaders make calls on a daily basis so that everyone knows the balls from the strikes.

From the management perspective, organizations have to craft their processes and procedures to reflect their commitment to ethical conduct.  In the sourcing arena, that means that there should be a periodic review of results that focuses not only on such issues as adherence to internal control procedures but also considers whether or not results are consistent with business expectations.  And, yes, every organization assumes its suppliers will bend over backwards to make them happy.  But, if one person has a significantly better track record, if one category area is always out in front in terms of hitting should-cost estimates, exceeding requirements, or in other ways outperforming the norm, red flags should go up.  Unfortunately, such a situation is frequently called “great work” rather than “potential risk”.  And, as in baseball, the pitch becomes what it is called.

Another management issue is that of the reward structure for the sourcing organization.  Bonuses based on cost savings are a two-edged sword.  They not only motivate good sourcing practices, they also provide powerful temptations to cut an ethical corner here or there so that bonus goals are met.  It should be obvious (and usually is in retrospect) that a sourcing group that consistently meets its price reduction goals year in and year out may not be working with the best interests of the organization as its primary motivation.  (I have seen situations where buyers asked suppliers to spread an offered price reduction over three years rather than granting it in the first year so they would be sure to make their numbers now and in the future!)  Here, again, what you call it becomes what it is.

The bottom line is that organizations need people, like the umpires, who look at the pitch dispassionately and call it as they see it.  A great tool in this regard is the application of scenario planning as part of the risk assessment effort.  One approach is to establish a process review system that includes the question, “What would we expect to see if someone broke faith with our ethical code?”  While there is no guarantee that such a review would have spotted the issue at Apple sooner, by naming surprising results a risk, the potential problem might have been identified and investigated more diligently.

What’s your take on this area of risk?  I’m interested in your thoughts, especially with regard to: 1.  Do you think that Apple’s experience is only remarkable because it was discovered, i.e., does this kind of thing go on far more than we realize?  2.  What have you seen that falls into the realm of risks that “…ain’t nothin’ ‘til someone says it is”?

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