Driving Value in Procurement 1 First Annual CIPSA Conference in Melbourne, Australia

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1 Driving Value in Procurement 1 First Annual CIPSA Conference in Melbourne, Australia Dr. Stephen L. Starling Executive Director, Roadmaps Institute 2604-B El Camino Real #365, Carlsbad, CA 92008, USA , (fax), WC.MAPS (USA toll free), (main line) stephen.starling@roadmapsinstitute.org, ABSTRACT This paper has three major sections. The first section presents an introduction to World-Class Supplier Management. The second section presents the results of a survey on World-Class Supplier Management for 31 companies and organisations from 13 industries in Australia. The final section introduces a model called DR 2 IVE TM that can be used by companies and organisations to guide their gap closures between current state and world-class. SECTION ONE: WORLD-CLASS SUPPLIER MANAGEMENT SM The first evolution of the World-Class Supplier Management SM concept was presented as a functionally focused model titled World Class Supply Management SM2 (WCSM) in the book of the same name by myself and my two co-authors David Burt and Donald Dobler. 3 In our book we stated, WCSM reflects those actions and values responsible for continuous improvement of the design, development, and management of an organization s supply system, with the objective of improving its profitability and ensuring its survival, as well as the profitability and survival of its customers and suppliers. The goals are similar in the new World-Class Supplier Management SM model, except that everyone in the firm, not just the supply management function, owns supplier management responsibility. The model for World-Class Supplier Management SM is presented in Figure 1. As a philosophy, World-Class Supplier Management SM spans functional boundaries and company borders. The philosophy requires change driven by upper management to shift decision-making processes from an internal department or single company focus toward optimization of the supply chain. A major focus of supplier management in this context is the development and management of a relationship portfolio, where a supply base is categorized into transactional, collaborative and alliance relationships. In the philosophy, supplier management is not departmentally or internally focused, but concentrates on proactively improving processes with the long-term goal of upgrading the competitive capability of the company and the company s supply chain. The evolution of purchasing to supply management is paralleled by the transition from the Mechanical Step to the Proactive Step in Figure 1. The Proactive Step is where the outcome can result in a win-win relationship for both parties. In the World-Class Step, the title chain management should replace the title supply management. Chain management recognizes management of suppliers and customers are interdependent activities. Despite the obvious benefits of progressing to the Proactive and World-Class Steps, many firms are still in the Clerical Step. 1 Copyright 2005 by Dr. Stephen L. Starling. Do not reproduce or distribute without written permission given by Dr. Starling. 2 The Strategic Supply Management Institute, Ltd. of Reno, Nevada holds a system mark on the term World Class Supply Management. 3 Burt, Dobler, Starling, World Class Supply Management: The Key to Supply Chain Management, 7 th edition, McGraw-Hill/ Irwin, 2004.

2 World-Class Supplier Clerical Management SM Tactical activities consume supply chain management resources Relationships with suppliers are transactional Relationships are adversarial and lack trust No relationship type segmentation Supplier interactions viewed as overhead to be minimized Organizational power of chain professionals too low to maintain strategic initiatives Focus on dealing with supplier problems, not solving them Fear drives supplier performance Supplier development does not occur No supply chain involvement in design Designers limit supplier selection pool Requisition development done in silos No supply chain training Focus on reducing price from suppliers Suppliers hide problems to improve external assessment Bidding used where negotiation should Large supply base driven by short-term contracts and design driven factors Supplier performance gaps not measured Time and motion studies required to gather accurate cost information Spot buying frequently required Expediting not controlled Data is not shared Mechanical Collaborative and alliance development strategy exists Computers process transactional paperwork Suppliers segmented by total spend Short and medium term contracts used for majority of total materials and services spend Supplier engagement policies developed Ethics policies developed and distributed Diversity program meets contract needs Supplier catalogs centrally managed Bidding versus negotiation analysis process Centralized parts database Centralized supplier database Quantity discount strategy developed Kaizen events used to create short-term gains in supplier performance Inventory categorized by importance Project management techniques and tools utilized for chain projects Eliminating poor performing suppliers strategy implemented for quick bottom line savings Internal inventory tracking system implemented enabling real time visibility Supplier development teams exist, but consist only of buying firm members and only address existing supplier problems Supply professionals involved in requirements development Standardization and simplification program reduces number of unique parts Internal supply chain training provided Reducing failure and appraisal costs of quality are a priority, but prevention costs are not measured or understood Supplier performance gaps are measured to select suppliers to punish or eliminate Non-financial performance scorecards used Quality and delivery data available and shared Supplier cost data accumulation system developed Proactive Alliance and collaborative relationships strategy aligned with corporate strategy Process focus shifts firm from functional silo syndrome to customer focus Centralized strategic sourcing strategy exists Supply environment monitoring systems Commodity strategies developed for firm Gating process in design involves suppliers Gating process involves supply professionals Learning curves measured Services acquisition strategy exists Litigation avoidance written into contracts Currency risk analyze procedures in place Hedging strategy developed Contract categorization process exists increasing use of incentive based contracts Recurring requirements plans developed Supply management guides source selection Diversity programs viewed as strategic asset Social responsibility and diversity programs fulfill perceived and contractual requirements Supplier development teams narrowly focused on process mapping, cycle time and quality Development is limited to first tier suppliers Relationship charters utilized and maintained Supplier support centers exist Design and development teams include key chain and cross-functional members Training is focused on internal members with a few suppliers included Internal inventory tracking systems linked with suppliers and customers in real time Single web portal developed for internal documentation on supply chain activities Knowledge dissemination within firm using workshops, annual meetings, roundtables Firm driven recognition and reward system for exceptional chain improvements Prevention and failure costs balanced Continuous improvement processes in place Supplier performance gaps measured to identify opportunities to help improve supplier Total cost of ownership measured for internal use with unreliable supplier cost estimates Savings from collaborative efforts shared with suppliers, but poor cost tracking creates doubt World Class Alliance and collaborative relationships strategy aligned with chain strategy Process focus shifts chain from corporate silos syndrome to customer focus Chain spanning process value analysis / engineering improves customer focus Trust building is measured Portfolio of relationships exists Portfolio of contracts supports relationship development and risk mitigation Design process and gates owned by chain, not single firm Supply base is by design Creative countertrade strategy increases sales Commodity strategies considered as a chain Suppliers provide defect free materials and services Supplier technology leveraged through collaborative approaches Development is bi-directional, supplier develops buyer where applicable Chain development projects include more than just process focused projects Focus shifts from first tier to include second+ tier suppliers Environmental impact of chain measured Organizational sharing exists for executives, capital and equipment Tangible commitment provided by CEOs to chain development projects Focus shifts to improving the chain versus chain competitiveness Training and education programs include chain members as regular participants Knowledge dissemination across chain using workshops, annual meetings, roundtables Bottom line impact for supply chain becomes the focus, not just two members of the chain Chain stretch goals, tempered with means, encourage discontinuous improvement Total cost of ownership measured across chain for chain improvement efforts Single portal online enabling near real time dispersion of chain data Chain driven recognition and reward system for exceptional chain improvements Cost data is accurate whether from ABC point analyses or other methods Open books exist between alliance chain members Figure 1: World Class Supplier Management SM Step Chart

3 Clerical Step The Clerical Step is plagued by transactional relationships that dominate the relationship portfolio of the firm. Very few, if any, collaborative and alliance relationships exist in the Clerical Step. In a transactional relationship, sales persons representing suppliers and their counterparts in purchasing are reasonably cordial, but frequently adversarial. A gain for one results in a loss for the other, which is often called a win-lose outcome. Manipulative tactics by both parties designed to maneuver the other side into a position where one s gain would be the other s loss often characterizes the interaction between vendor and purchasing. The Clerical Step of World-Class Supplier Management SM is defined by the following attributes. Unlike the remaining three steps, every bullet (attribute) in the Clerical Step is a negative state or reactive capability. (Tip: Managers find it easiest to start evaluating themselves with the Mechanical or Proactive Step and then working backward and forward respectively to the Clerical and World-Class Steps.) Tactical activities consume supply chain management resources Relationships with suppliers are transactional Relationships are adversarial and lack trust No relationship type segmentation Supplier interactions viewed as overhead to be minimized Organizational power of chain professionals too low to maintain strategic initiatives Focus on dealing with supplier problems, not solving them Fear drives supplier performance Supplier development does not occur No supply chain involvement in design Designers limit supplier selection pool Requisition development done in silos No supply chain training Focus on reducing price from suppliers Suppliers hide problems to improve external assessment Bidding used when negotiation should be used Large supply base driven by short-term contracts and design driven factors Supplier performance gaps not measured Time and motion studies required to gather accurate cost information Spot buying frequently required Expediting not controlled Data is not shared In the Clerical Step, tactical activities consume supply chain management resources. The high ratio of suppliers to procurement and supply managers prevents the development of advanced relationships with suppliers. The focus of the relationships are on gaining price concessions from suppliers with almost no consideration of total cost impacts. Bidding is often the methodology of choice to drive prices down and pit suppliers against one another. The price focus forces almost all relationships to be transactional where suppliers are considered interchangeable. Such interchangeability leads to adversarial interactions and very little trust between buying and supplying firms. Fear of losing the customer s business is the primary driver for the supplier in improving or maintaining supplier performance. Since almost all relationships are transactional, there is little point in categorizing the supply base into relationship types by performing a segmentation analysis. Quality failures, late deliveries, late completion of services and a slew of other preventable problems with suppliers are common in the Clerical Step. Negativity tends to dominate discussions and interactions with suppliers. Supplier interactions are viewed as overhead to be minimized, not investments to minimize total costs. Almost all of the interactions are reactive and focus on dealing with supplier problems, not solving them in a proactive manner so that they will not reoccur in the future.

4 A cause of the reactive approach to supplier management in the Clerical Step is that the organizational power of chain professionals is too low to maintain strategic initiatives. For example, in the area of supplier development a supply manager needs to leverage resources across multiple departments and across multiple firms. Such organizational power is rare. Even when organizational power is granted, departmental budgetary constraints usually mitigate the effectiveness of proactive supplier engagements. Mechanical Step In the Mechanical Step of World-Class Supplier Management SM, upper management understands the need for proactive management of the supply base. Upper management has allocated resources to improving supplier management technology and performance. Management now recognizes the need for developing a portfolio of relationships and is willing to invest in technologies and processes to enable development of strategies for collaborative and alliance relationships. Advances also occur in the establishment of a variety of policies, procedures and methodologies that set the stage for the evolution to the Proactive Step. Among the policies established are ones for supplier engagements, ethics, diversity programs, selection of suppliers and price versus quantity. The Mechanical Step lays the foundation for the evolution to the Proactive Step. The Mechanical Step has the attributes in the following list. All of the attributes in this step are relatively positive developments in comparison to the Clerical Step. The attributes represent capabilities and states that will help the organization evolve to the next step. Collaborative & alliance development strategy exists Computers process transactional paperwork Suppliers segmented by total spend Short & medium term contracts used for majority of total materials & services spend Supplier engagement policies developed Ethics policies developed & distributed Diversity program meets contract needs Supplier catalogs centrally managed Bidding versus negotiation analysis process Centralized parts database Centralized supplier database Quantity discount strategy developed Kaizen events used to create short-term gains in supplier performance Inventory categorized by importance Project management techniques & tools utilized for chain projects Eliminating poor performing suppliers strategy implemented for quick bottom line savings Internal inventory tracking system implemented enabling real time visibility Supplier development teams exist, but consist only of buying firm members & only address existing supplier problems Supply professionals involved in requirements development Standardization & simplification program reduces number of unique parts Internal supply chain training provided Reducing failure & appraisal costs of quality are a priority, but prevention costs are not measured or understood Supplier performance gaps are measured to select suppliers to punish or eliminate Non-financial performance scorecards used Quality & delivery data available and shared Supplier cost data accumulation system developed Despite the improved vision for the chain, no collaborative and alliance strategy exists. Short and medium term contracts fulfill the procurement of the majority of total materials and services. Eliminating poor performing suppliers is a strategy used to generate quick, bottom line savings. Supplier development teams exist, but consist only of buying firm members and only address existing supplier problems. Development does not address proactive projects.

5 Proactive Step Six years ago Michael Dell, founder and CEO of Dell Computer declared that "Collaboration is the new imperative." 4 Similar declarations were made by CEOs across the globe. Despite the declarations and documentation of the benefits of collaboration, collaboration is still not used to develop competitive advantage within most companies and their chains. Upper management declarations are required to evolve towards improved collaborative relationships; however, new systems, methodologies, policies and education programs are required for a company to evolve to the Proactive Step of World-Class Supplier Management SM. The Proactive Step of World-Class Supplier Management SM is defined by the following attributes: Alliance and collaborative relationships strategy aligned with corporate strategy Process focus shifts firm from functional silo syndrome to customer focus Centralized strategic sourcing strategy exists Supply environment monitoring systems Commodity strategies developed for firm Gating process in design involves suppliers Gating process involves supply professionals Learning curves measured Services acquisition strategy exists Litigation avoidance written into contracts Currency risk analyze procedures in place Hedging strategy developed Contract categorization process exists increasing use of incentive based contracts Recurring requirements plans developed Chain management guides source selection Diversity programs viewed as strategic asset Social responsibility and diversity programs fulfill perceived and contractual requirements Supplier development teams narrowly focused on process mapping, cycle time and quality Development is limited to first tier suppliers Relationship charters utilized and maintained Supplier support centers exist Design and development teams include key chain and cross-functional members Training is focused on internal members with a few suppliers included Internal inventory tracking systems linked with suppliers and customers in real time Single web portal developed for internal documentation on supply chain activities Knowledge dissemination within firm using workshops, annual meetings, roundtables Firm driven recognition and reward system for exceptional chain improvements Prevention and failure costs balanced Continuous improvement processes in place Supplier performance gaps measured to identify opportunities to help improve supplier Total cost of ownership measured for internal use with unreliable supplier cost estimates Savings from collaborative efforts shared with suppliers, but poor cost tracking creates doubt World-Class Step In the World-Class Step, the relationship strategies of key collaborative and alliance firms are simultaneously considered. Current chain alliance members decide together whether the source for a specific product or service should remain a transactional source or the source should evolve into a collaborative or alliance relationship. Conversely, decisions on downgrading an alliance member to a lesser collaborative or transactional role should be jointly made and openly discussed. Through such discussions, alignment can occur between the relationship portfolios and strategies of alliance members. 4 John L. Mariotti, Collaboration is the Way to Go, Supply Chain Management Review, Spring 1999, p. 75

6 The World-Class Step of World-Class Supplier Management SM is defined by the following attributes: Alliance and collaborative relationships strategy aligned with chain strategy Process focus shifts chain from corporate silos syndrome to customer focus Chain spanning process value analysis / engineering improves customer focus Trust building is measured Portfolio of relationships exists Portfolio of contracts supports relationship development and risk mitigation Design process and gates owned by chain, not single firm Supply base is by design Creative countertrade strategy increases sales Commodity strategies considered as a chain Suppliers provide defect free materials and services Supplier technology leveraged through collaborative approaches Development is bi-directional, supplier develops buyer where applicable Chain development projects include more than just process focused projects Focus shifts from first tier to include second+ tier suppliers Environmental impact of chain measured Organizational sharing exists for executives, capital and equipment Tangible commitment provided by CEOs to chain development projects Focus shifts to improving the chain versus chain competitiveness Training and education programs include chain members as regular participants Knowledge dissemination across chain using workshops, annual meetings, roundtables Bottom line impact for supply chain becomes the focus, not just two members of the chain Chain stretch goals, tempered with means, encourage discontinuous improvement Total cost of ownership measured across chain for chain improvement efforts Single portal online enabling near real time dispersion of chain data Chain driven recognition and reward system for exceptional chain improvements Cost data is accurate whether from ABC point analyses or other methods Open books exist between alliance chain members SECTION TWO: WORLD-CLASS SUPPLIER MANAGEMENT SURVEY A one question survey was sent out to the members of the Chartered Institute of Purchasing and Supply of Australia. The question was Where would you rate your company on the scale from 1-10 using the World-Class Supplier Management SM Step Chart in Figure 1? Respondents were given the flexibility of either using a set of formulas to calculate a value from 1-10 or to simply look over the chart and estimate where they believe their organization is currently rated. The formula was provided in a paper that accompanied the survey. Survey Results Results for the survey on World-Class Supplier Management were calculated using responses from 31 companies and organisations from 13 industries in Australia. Respondents to the survey were limited to procurement professionals. No attempt was made to confirm accuracy of the responses from the respondents. Follow-on audits would be required to validate and verify the results. Additional organisations would have to be added to the survey to generate statistically significant results for each industry. Accuracy and scope issues aside, the survey provides a valuable glimpse of the current state of Australian organisations. The average score across all 31 organisations was Assuming results are indicative of Australia, then Supplier Management in Australia is currently rated as Mechanical. The categorization as Mechanical means that the average scores is between 2.50 and 4.99.

7 Table 1 presents the averages by industry. For example, the first line in Table 1 shows that five mining companies responded to the survey. The average score of the five mining companies was The score for mining of 7.18 is in the Proactive range from Hence, we can refer to the mining industry as on the average being proactive in supplier management. Industry (# Resp.) Score Step Mining (5) Energy (2) Banking (2) Technology (2) Textiles (1) Utilities (3) Manufacturing (2) Entertainment (1) Tourism (1) Health (1) Government (7) Defense (1) Education (3) Proactive Mechanical Clerical TABLE 1: World-Class Supplier Management Capability of Australian Industries Referring to Table 1, the survey results demonstrate that the application of world-class capabilities varies widely between industries in Australia. The results also reveal that some industries have significant gaps between current state and world-class capabilities in supplier management. SECTION THREE: CLOSING THE GAPS WITH DR 2 IVE TM Knowledge regarding the existence of gaps between current state and world-class serves no purpose unless a plan is created to close the relevant gaps. During my fifteen years in academia, I have had the wonderful opportunity to work with many of the best companies in the world in measuring their gaps. Many of these sessions were with procurement professionals in think-tank sessions where we would conduct a full assessment of the supply management capabilities of the participant s company or organisation. Managers would depart from the gap assessment and analysis sessions with enthusiasm and the belief that they could return to their company or organisation and effect positive change. Unfortunately, the enthusiasm would usually be short lived. Procurement professionals often discover the changes they desire are constrained by other functional areas and resource limitations. For example, suppose that an outcome of the assessment of a company s current state against world-class yields the desire in a procurement professional to select suppliers based on the Total Cost of Ownership (TCO) instead of price. The desire to implement what appears to be such a simple concept seems docile enough. In reality, systematic measurement of TCO requires the cooperation of Accounting professionals to develop standards for measurement. Application of standard cost accounting measures is often inadequate for a TCO analysis. Usually, some form of Activity Based Costing (ABC) is needed to properly allocated the costs. Most companies do not use Activity Based Cost systems. Similarly, Information Technology professionals are needed to develop the required technology to acquire and house the data. A data warehouse may be required. Quality professionals would need to contribute to the development of

8 Costs of Quality metrics that are often a major cost driver of TCO. Many companies measure the Costs of Poor Quality, but most do not measure the full Costs of Quality. Leadership buy-in would also be needed. Although the previous discussion sounds grim for procurement professionals, as well as any professional trying to exact improvements within their organisation, there is a solution. The example details the fact that advancement in one core competency of a company or organisation requires simultaneous advancement within other core competencies. The solution for procurement professionals is to collaborate within your company to improve all core competencies simultaneously. The conclusion? Trying to implement improvement projects unilaterally from within a Purchasing or Procurement Office or Department is often doomed to failure. Procurement professionals that add the greatest value within their organisations recognize this fact. Value adding procurement professionals engage in the development of the organisation as a whole. Such engagement not only gains the recognition of other professionals within the organisation, but it also ensures that procurement projects are included in the overall strategic plans of the organisation. The remaining sections of this paper introduce a methodology designed for such engagement. DR 2 IVE TM Overview World-class capabilities of companies cover a broad spectrum of core competencies that can be classified into categories that cross functional and company or organisation boundaries. Over the last three years, the Roadmaps Institute has developed a 360 o model for assessing, measuring and developing roadmaps that integrate such core competencies. The model is called DR 2 IVE TM. The acronym DR 2 IVE TM stands for Developing Robust Roadmaps Integrating Value Enterprises. Instead of assessing one core competency area for a company or organisation, DR 2 IVE TM endeavors to capture assessment of all core competencies. The Roadmaps Institute TM has accomplished this by developing twenty step charts with the same format as the World-Class Supplier Management chart, but which cover other core competencies. An example of the assessment phase of the model is presented in Figure 2 on the following page. Figure 2 is called a Navigation Wheel with the DR 2 IVE TM model. In the illustration, thirty-two managers from a major aerospace company rated six of their company s divisions in six teams. Two of the teams, one representing a European division and the other a North American division, decided to plot their results on the same Navigation Wheel. The Navigation Wheel quickly highlights where one division can help another. The North American division had greater capability in Quality, Design, Program, and Lean Management. The European division excelled in Customer, Demand, and Leadership Management. The two divisions were nearly equal in Supplier, Cost, and ecommerce Management. From the comparison, actual attributes in the World-Class Management Charts can be identified that gave one division the higher score over its counterpart. From the attributes, projects between the divisions can be developed and mapped. Assessment to Roadmaps DR 2 IVE TM starts with assessment using step charts. The charts are based on world-class best practices across all industries. The charts were developed using a mixture of actual assessments, academic thinktanks, published literature, surveys, manager interviews, facility visits, and speaker engagements. The assessment phase is designed to reveal opportunities for improvement within each company. If multiple divisions and chain members are represented in the assessment, then collaborative opportunities will be revealed at the division and chain levels. From these opportunities, projects are derived to close the gaps. DR 2 IVE TM recognizes that projects are the fundamental building blocks to leverage collaboration in the chain. Identifying target projects improves the chain, competitive capability increases, and market share grows. Traditionally, companies have not modeled interdependencies among projects because of technological and organizational constraints. How these opportunities are translated into projects is beyond the scope of this paper. Suffice it to say that an entire pedagogy, literature series, set of academic programs, software suite and mathematical models

9 have been developed to enable companies to develop what the Roadmaps Institute TM calls Robust Roadmaps TM. Please contact the Roadmaps Institute TM for more information. WC Program Mgmt WC Demand Mgmt WC Lean Mgmt WC Quality Mgmt WC Supplier Mgmt WC Customer Mgmt FIGURE 2: A Comparison of Two Aerospace Company Divisions CONCLUDING REMARKS All companies have roadmaps, but almost all such roadmaps are intangible. Intangible roadmaps are implied, but cannot be documented. Intangible maps are floated by upper management based on mission statements, suggestions, innuendos, and historical investment in initiatives (i.e. projects). By contrast, tangible roadmaps exist in electronic, printable form. Tangible roadmaps show past achievements, current state, and future plans. Tangible roadmaps show your employees and shareholders explicit paths to the future of your company. Tangible roadmaps are the key result of DR 2 IVE TM. A model for World-Class Supplier Management was presented to demonstrate how a procurement professional can quickly assess the capabilities of a company to determine gaps for closure. The model was used as the basis for a survey on the capability of Australian industries in supplier management. The survey results were presented for 31 Australian companies and organisations. The conclusion was that Australian companies and organisations currently rate as mechanical in their supplier management capability. The final section of this paper pointed out that assessment of capabilities does not produce results. Assessment must be followed by development of plans for closure of the gaps. Such plans will not succeed to their greatest potential if created only within the Procurement Department or Office. A holistic development approach is the best solution. DR 2 IVE TM was offered as a solution since the methodology results in integrated and tangible roadmaps developed by professionals from all functional areas, as well as multiple chain members if desired. Please contact the Roadmaps Institute TM for more information on how your organisation can leverage the methodologies incorporated in DR 2 IVE TM to create your own roadmaps. WC Design Mgmt European Division North American Division WC Cost Mgmt WC ecommerce Mgmt WC Leadership Mgmt