THE EUROPEAN INSTITUTE O F P U R C H A S I N G M A N A G E M E N T Will the traditional Purchasing and Supply organisation be capable of matching the demands of the future? Dr. Peter Laurence, EIPM Page 1
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A New Set of Competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 2
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A New Set of Competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 3
Global forces are shaping a radically different competitive environment and the frontiers of competition are changing at an ever increasing rate Competitive Pressures in the Supply Chain Ever more demanding customers and consumers Changing market boundaries and new channels Shortening product life cycles Speed of technology change Hypercompetition + Globalisation Aggressive global competition Industry consolidation and alliances Stakeholder pressures Environmental and risk issues Source: Professor Alan Waller Serving localised customer needs through longer, more complex supply lines Page 4
There is a consistent view of the business pressures as we enter the new millenium The top 5 Globalisation leveling the playing field Hypercompetition destabilization Focus on core competence virtual organization Speed of change disruptive change Stakeholder pressures consumer, pressure groups, investors Source: European Supply Chain Directors Discussion Forum, - 2000 to 2004 Doing nothing is not an option Page 5
The classic hypercompetitive strategies imply speed and agility to succeed Profits from a sustained competitive advantage Profits from a series of actions Launch Exploitation Exploitation Counterattack Time Firm has already moved to advantage 2 Counterattack Traditional View Leveraging Price; Quality; Technology; Time to deliver short term competitive advantage Hypercompetition Launch Time Source: Richard D Aveni and Robert Gunther Page 6
Whilst responding to the ever more demanding stakeholder pressures: Sustainability Sustainability is not just the environmental issue. Three Pillars of Sustainability Economic: Supporting sustainable wealth creation; ways for people to create wealth without harming natural systems or human beings Societal: Building civic capacity; creating opportunities and capacity for citizens to participate in the shaping of their future Environment: Protecting natural systems; protecting, preserving, and restoring the adaptive capacity of natural systems Page 7
Disruptive change, not only driven by technology The Law of Disruption Change Technology Change Social Change Friedman* proposes ten flatteners that have acted as disruptive forces on the world economy, heavily biased towards technology enablers, but including political, social and business drivers *Thomas Friedman; The World is Flat Business Change Political Change Time Year 2000 Source: Downes and Mui Page 8
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A New Set of Competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 9
So it is all about value creation.... A business is profitable if the value it creates exceeds the cost of performing the value activities. To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in such a way that leads to differentiation and a premium price (more value) Professor Michael Porter Harvard Business School Page 10
Leveraging the Value Chain for Competitive Advantage... Value Advantage Tailored service Reliability Responsiveness, etc High Low Focus on Customer Value-Added Commodity Cost and Service Leader Focus on Process Improvement Low Cost Advantage Capacity utilisation Asset turn Schedule integration, etc High Page 11
... with a steady mutation from the Supply Chain to the Demand Web.. Businesses are responding by focusing on core competencies and outsourcing non-core activity creating networked organisations Vertical integration Network organisation Source: Chatham House Forum Page 12
Towards synchronisation of the overall value stream for Fair Share returns Performance cost effectiveness value Functional Excellence Performance Gap Process Integration Value-Profit Innovation Performance Gap NEW GROUND Agility and Lean techniques as key attributes & enterprise capabilities Supply Chain Management is no longer just about functional excellence or process redesign.. leaders are moving to a new tier of value stream performance function process integration synchronisation Approach to Value Chain Execution Source: Solving International Page 13
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A new set of competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 14
Flattening the world requires an adapted Supply Chain response... Traditional Supply Chain Characteristics Length of supply chain: short Geographical spread: limited Extended enterprise: highly integrated and inflexible Information visibility: very low Market structure: mainly local Management concepts: JIT, closeness towards supplier and customer prevalent Flat Supply Chain Characteristics Length of supply chain: longer, more complex Geographical spread: extensive, enabling organisational presence globally for all business functions Extended enterprise: not so tightly integrated, flexibility to switch and expand extended enterprise Information visibility: very high. This critical component positions the company as a flat supply chain organisation Market structure: not constrained to local boundaries, widely spread Management concepts: JIT, closeness towards supplier and customer do not hold Source: Aarish Goel and Murali Krishnan Sundararajan Page 15
Calling for a critical examination of the Supply Chain strategy... Processes Robust S&OP processes Application of lean concepts Agility! Risk management Exception management People Empowerment Balanced global / local organisation New skill sets Training Aligned Metrics Tools Robust ERP Visibility Collaborative tools Open standards Monitoring and Alerts Page 16
.... with AGILITY as the cornerstone of the business strategy.. A company s ability to consistently identify and seize opportunities more quickly and effectively than rivals Agile organisations have managers adept at managing four critical kinds of discussion; making sense of the outside world to spot opportunities as they emerge; making the right choice from the possibilities that present themselves; making it happen ; and making mid-course corrections as new information becomes available make sense, prioritise, make things happen, revise assumptions 2005 by Dr Richard Wilding Professor Donald Sull, London Business School Page 17
.... and building on our Purchasing assets to deliver the value potential... Purchasing is one of the most suited function to create value for the company, with a complete vision of the whole supply chain. There are few options for Purchasing: To take the lead, to be strategic and create value To be only operational and to be outsourced Joe Cavinatto, Wharton Business School Page 18
... delivered through Strategic Purchasing and Supplier Relationship Management Value Creation FUNCTIONAL FOCUS CROSS FUNCTIONAL FOCUS Focus Transactional orientation Commercial orientation Purchasing coordination Internal integration External integration Value chain integration Time Serve the factory Reduce price Savings thru synergy Total cost of Ownership Supply Chain Optimisation Total Customer Satisfaction Activities Clerical Order processing Commercial Tendering Negotiating Approved supplier lists Volume consolidation Contracting Global sourcing SRM Cross funct. buying teams Systems integration Vendor rating Perf.based contr. Outsourcing Co-development Shared cost models Supplier develop. SC optimisation Customer driven activities Joint develop. Integration of suppler s tech. Global supplier network integration Adapted : Van Weele 2002 Supplier Development Page 19
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A New Set of Competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 20
What we are witnessing is fundamental shift in focus for the manager in the value chain Jobs for life Education for life Reference books Employment Education Knowledge Life of jobs Life of education Gateway to the world Manage the business Functional Performance Organisational performance Management KPI s Vision Change the business Cross-functional performance Value net performance Ways of working Solo working Leadership Direction Relationships Competitive Adapted: Professor Alan Waller Team working Empowerment Collaborative Managers will need to be focused but flexible - for life Page 21
Technology is required to remove the barriers for collaboration Like bees, humans are born collaborators and as (technical) barriers to communication are removed, teamwork is increasing If collaboration hasn t happened in the past, its because barriers got in the way geography, time zone, position in the corporate hierarchy, language.. Most technology does not really help collaboration so much as reduce the effect of barriers. These technologies enable individuals and groups to communicate easily and across time and space, sharing data and the same version of the truth Alan Cane, Financial Times Page 22
Building a win-win relationship through trust and collaboration DEPTH OF RELATIONSHIP Cooperation Short duration, low risk interaction Coordination Longer commitment, greater working together TRUST Collaboration Joint planning and definition of operations and strategy Win-Win Relationship Risk Uncertainty Interdependence Choice Adapted: Dr Richard Wilding Page 23
Finding the appropriate balance between global, regional and local accountabilities Marketing Global Product strategy Global marketing Local Market intelligence Trade marketing Operations Operations strategy Technology Focus plants Finance Financial strategy Treasury operations Legal accounting Management support Purchasing & Supply Chain HR Network strategy Commodity mgt HR strategy Global OD programmes Local supplies Market intelligence Local recruitment Compensation & OD mgt R&D / Engineering Technology platform Standard products Customisation Technology support Page 24
Developing the appropriate balance of hard and soft skills aligned to the organisation Core Skills Supplier selection Negotiation (using cost breakdown) Currency & RM rates control Consolidate volumes LCC sourcing Supplier monitoring Complementary Skills Outsourcing Co-development Shared cost models Supplier develop. SC optimisation Relational Behaviours Dialogue and infomation sharing Risk management Building trust CSR / Ethics Value chain integration Page 25
Understanding how Emotional Intelligence gains competitive advantage in the value chain. Top 25% of companies selected for profitability, Cycle times, output etc. showed the following characteristics: A passion for competition and continual improvement. Organisational commitment to a basic strategy. Open communications & trust-building with all stakeholders. Building relationships both internally & externally that offer competitive advantage. Collaboration, support, and sharing of resources Innovation, risk taking, and learning together. Source: Goleman Working with Emotional Intelligence 1998 Page 26
Value Chain Integration is driving the purchasing practitioner to a new set of competencies Lean Team working Agile Value network capability Vision Functional Capability Technology Sustainability CSR / Ethics Risk Awareness Collaboration Knowledge development Page 27
AGENDA The Drivers of Change Towards Value Profit Innovation Flattening the Supply Chain A New Set of Competencies The Future of Purchasing and Supply Chain Management: The way ahead Page 28
How can we build a robust Purchasing and Supply organisation for the future? We must adopt an organisation structure which empowers decision making and drives agility Purchasing and Supply must be recognised as a strategic function and enjoy board level representation The Purchasing and Supply KPIs must be fully aligned with relating functions and support the corporate Balanced Scorecard HR and Purchasing Management must work together to develop the competence sets of the future Purchasing and Supply managers Industry and academia have an obligation to fund and promote the training programmes required of the next generation of Purchasing and Supply professionals Page 29
The Future of Purchasing and Supply Chain Management: The way ahead Purchasing and supply chain of the future will pull the best from the lean and agile worlds Technology will continue to open up opportunities, but we need the management skills to obtain maximum leverage The future will take us ever closer to the virtual organisation, linking off-shoring and outsourcing through effective collaboration Risk management, sustainability and supply chain resilience will be a major preoccupation for the business manager Change is inevitable. We must embrace change and turn it to advantage; value chain integration will play a pivotal role in future business strategy Page 30
Thank you for your attention To continue the discussion, please contact Dr. Peter Laurence EIPM Tel: +41 79 620 3802 plaurence@eipm.org Page 31