A Supply Chain Manager’s Guide to Strategic Purchasing, OR How to be on top of things instead of having things on top of you!

OMTEC 2010 attendees gave Becky Morgan high ratings for her presentation on this topic in June. Therefore, we’ve asked her to summarize her session for the benefit of all BONEZONE readers. (Most speakers’ presentations, including this one, are available online at www.orthoworld.com.)

Do your Supply Chain Management (SCM) processes provide competitive advantage for your business?

Does this sound familiar? Expedite shipments because of a newly discovered inventory error; correct invoice – PO price discrepancies; receive notice of an unexpected price increase on a major commodity; discover that a scheduled delivery has not arrived, without advance warning from the supplier; field dueling complaints of too much inventory from Accounting and not enough from Sales. Such non-value-added drama is the daily life of entirely too many SCM teams.

That exhausting work life doesn’t leverage the abilities of employees, nor does it help the company become more profitable. Continuing to operate supply chain functions in that manner doesn’t make sense for anyone. Here are four systems that, together, position your supply chain team for success:

  • Integrated business, marketing and operations
  • Effective metrics
  • Benchmarked supply chain processes, and
  • Finish Strong®™ – a process to ensure that
    improvements are maintained

Integrated Business, Marketing
and Operations Strategies

Very few successful businesses operate without a business strategy, and most have a marketing and sales strategy as well. Unfortunately, entirely too many companies consider operations to be what happens after the important work of getting customers and orders is done. Operations is the “fill order” folks.

Consistent with that view, operations professionals have often not been taught to think, speak and behave strategically. University manufacturing and operations curriculum focus on tools and techniques. The “fill order” mentality reinforces that non-strategic education as experience is gained. Additionally, accounting refers to operations as a cost center. Cutting is good; thinking, strategizing and investing is frivolous.

Take a minute to consider: What is the purpose of operations? Its real role is to:

  • Support the business and marketing strategies
  • Create and deliver brand promise and competitive advantage to the market (marketing chooses the words; operations actually makes it happen, or not)
  • Connect infrastructure to business and brand promises
  • Do so within mutually defined target costs, and

The odds of that responsibility being fulfilled by a reactionary non-strategic function are extremely long, yet a bet that many companies make daily.

Supply chain success is reliant upon context provided by integrated business, marketing and sales and operations strategies. Those strategies provide perspective for decision-making and priorities in the best interest of the business.

The operations and supply chain strategies must reflect organizational realities. Transitioning from a non-strategic fire-fighting performance to one that provides competitive advantage (or at least not disadvantage) will require investment in developing supply chain resources. Even if brilliant and fully capable, supply chain professionals need to benchmark other organizations. Likely education and training are needed as well. Changing expectations dramatically, and this is a significant change, doesn’t get immediate and automatic results. Wishing doesn’t make it so. Assessment, planning and execution can.

The operations strategy must integrate, and typically includes, product and process development, supply chain management, production, quality, engineering and customer service. Supply chain management is not independent of other aspects of operations. It must be woven effectively into the provision of brand promise and competitive advantage with the rest of operations.

Effective Metrics
In over 20 years of consulting with manufacturers, along with surveying over 100 more companies, I have found that “bad metrics” top the list of confusion-inducing management direction. Ineffective metrics fail to motivate the desired behaviors, but worse, bad metrics motivate undesired, inconsistent and unproductive behaviors. Bad metrics abound.

What makes definition of effective metrics difficult? First, we let Accounting play too big a role in defining them. In fact, many companies have few non-financial metrics. Driving a purchasing professional to focus strictly on (for example) reducing purchase price or minimizing purchase price variance (PPV) leads to short sighted decisionmaking, and often motivates behavior contradictory to the metrics given the inventory manager. As management guru Peter Drucker once said, “Enterprises are paid to create wealth, not control costs. But that obvious fact is not reflected in traditional measurements.” Secondly, without an integrated operations strategy, metrics reflect a shotgun approach, with holes and contradictions a natural result.

If you expect different suppliers to contribute differently to your competitive advantage, you must have different measures of their performance. Supplier assessment systems typically quantify delivery and quality, but what about the supplier that strengthens your ability to get new products to market more quickly? Or helps you stay on top of evolving technologies? What about the supplier that offers suggestions on how to reduce costs? How do your metrics identify the supplier that is not committed to continuous improvement in meeting your expanding requirements?

So, the first step in defining effective metrics is to clearly state the goal. Exactly what behavior do you want to motivate (or de-motivate) in that supplier? Next, examine how the metric can drive negative unintended consequences (see minimize purchase price example above). Additional tests of metric quality include:

  • Consistent with strategic goals
  • Unambiguous
  • Cause and effect understood
  • Benefit outweighs cost
  • Clear baseline/benchmark
  • Timely, consistent and reported by those
    closest to the subject

Once those tests are passed, check for practicality:

  • Do employees understand the metric?
  • Do employees relate the measure to their actions/decisions?
  • Do employees understand the priorities of all measures that they impact directly?
  • Do employees have timely access to the information they need to make good decisions, and do they know how to use that information?

Benchmarked Supply Chain Processes
It is important to know how your supply chain operations compare to those of competitors, to comparably sized companies and to best practices. You can be sure that if your supply chain operations are not increasingly contributing to brand promise and competitive advantage, you are losing ground. SCM has developed dramatically over the past 20 years. And as your company grows the top line, the bottom line cannot grow with it unless you have competitive supply chain operations. Inertia is deadly.

Negotiating lower purchase prices by intimidation or threats does not make the top ten list of effective supply chain strategies. You may find the items that are of most significance to be a bit surprising.

One of the fastest growing skill sets required to competitive supply chain management is problem-solving. Problem-solving, you ask? Yes. One of the most significant competitive advantages that any manufacturer can have is that of driving repeat problems from its business. That means real problem solving, not just filling and filing Corrective Action Requests that get the customer, boss or quality manager off your back. It means getting to root cause with a countermeasure that prevents the problem from reoccurring. The value of the ability to solve problems effectively throughout the supply chain, especially as geographic and cultural diversity grows, cannot be overestimated.

Decision-making is another critical skill set to successful supply chain management. Consider, for example, the decision to outsource and/or offshore. Many companies have chased the holy grail of cheap labor, outsourcing or moving operations to low wage-rate countries. Now, a significant number are
re-shoring and/ or insourcing as they discover the very real total costs and negative impact on brand promise and competitive advantage some of those same decisions created.

Outsourcing should be a strategic decision first, not a financial one. Successful outsourcing requires advanced collaboration, communication and problem solving skills, supported by mutual commitments to partnership and dual financial stability. Few cost analyses address those factors well. Numerical analysis alone, considering only easily quantified costs and perhaps a fudge factor, is insufficient for good supply chain decisions. Is the decision-making and analysis skill set of your supply chain group competitive?

Additional skill sets that separate the great supply chain organization from the pedestrian one include:

  • Mastery of Total Cost of Ownership concepts
  • Knowing, understanding and using best practices in your most important supply streams
  • Understanding and helping improve supplier cost factors
  • Effective supplier assessment and development (recall metrics conversation above)
  • Effective supplier integration in new product development and time-to-market

Long gone are the days of good supply chain execution, meaning “get three quotes and choose the lowest,” and treating the supplier relationship as “win/lose.”

Finish Strong®™
The riches of a well-conceived operations strategy, supported by effective metrics and a supply chain organization with the described skill set, will only be maximized if your organization is able to maintain the improvements that it makes. Most cannot.

Too many executives believe that if they have given the assignment, it is done; that if an improvement has been put in place, it will last. They are wrong.

Your customers expect you to be good at your chosen line of work. That alone is not enough. The real question is, given that you and your competitors each are likely to be skilled at the technical side of your business, how can you routinely and consistently execute better than they? Too many organizations start fast, yet fail to finish. A strong finish – a job well completed – can differentiate you from the competition, leaving a positive and lasting impression in the minds of your customers and lead profitable growth.

Finishing Strong™ is about creating the systems that allow for completed work – on time, on budget, as promised. Loose ends define your brand; the more loose ends, the weaker the brand and the weaker customer loyalty. Finish Strong®™ is a way of thinking about operations that builds in the crossing of operational “t’s” and the dotting of operational “i’s.” Does your supply chain management and operations team Finish Strong®™?

Where do you begin? Unfortunately, there is no “one size fits all” answer. It depends upon your current strengths and weaknesses, your competitive environment and your business strategy. But one thing is certain. If you don’t begin leveraging the four systems described in this article, your competitive position will decline. Your company will not attract and retain top performers. Your cost structure will deteriorate. Your SCM employees will be busy, but contributing little to the success of the business. And it won’t be their fault.

Rebecca A. Morgan, President of Fulcrum ConsultingWorks, is a manufacturing strategy consultant skilled at clarifying complex ideas, finding creative solutions to problems and developing and leveraging operational strengths. She works with manufacturers to develop and execute an operations strategy that enables them to leverage resources and deliver profitable competitive advantage to their markets. Her ability to work as effectively with off-shift workers as with owners and C-level executives and her 30 years professional experience combine to support both strategic vision and daily execution. Morgan’s experience spans Operations, Supply Chain Management, Accounting Systems, Information Systems, Strategic Planning, Consulting and Academe. She has been directly responsible for cost and revenue centers in single and multi-plant situations. Becky Morgan can be reached at morgan@fulcrumcwi.com.

Fulcrum ConsultingWorks, Inc.
216-486-9570 (phone)