dangerous myths series (excerpt)

DANGEROUS SUPPLY CHAIN MYTHS

Morning Session – Day 1 Conference Excerpt

Original Presentation Date:2008

Conference Duration:2 – Day Seminar

www.procureinsights.com 2

Dangerous Supply Chain Myths

Central ThemeIdentifying the weakest links of conventional

supply chain thinking



“Those that fail to learn from history are doomed to repeat it”

Winston Churchill



Dale Neef – e-Procurement: From Strategy to

Implementation

75% of all such initiatives (e-business) will fail despite the benefits to all transactional stakeholders. (2001)

http://www.chapters.indigo.ca/item.asp?Item=978013091411&Catalog=Books&N=35&Lang=en&Section=books&zxac=1



The Wall Street Journal73% of all implementations result in

partial or total failure. (2/2005 )

FORTUNE MagazineExecs Tell Software Makers: “Some

of You Are Doomed.” (2/5/2005)

http://www.fortune.com/fortune



Journal of Information Technology

“Fountain (2001), for example, asserts that approximately 85% of government information technology projects worldwide have been failures.” (1/9/2007)



The perpetuity and persistence of erroneous thought . . .

urban legends of the supply chain



“Succeeding” in a Dynamic World(CAPS, A.T. Kearney and ISM 2007 Report)

• Category Strategy Development• Supplier Development and Management• Multiple Supply Chain Networks• Internal and External Collaboration• Talent Attraction & Retention• Enablement of the Supply Management Organization• Enabling Technology



Myth No 1 - Category Strategy Development

“Consolidate your supply base for each category into a small number of preferred suppliers that can be efficiently managed while mitigating risk. The strategy for each category should focus on the overall value chain over a three-to-five year time frame.”



Position Reasoning

• Global nature and reach of procurement practice• Increased outsourcing and customer segmentation



Critical Elements

• A detailed category strategy development process• Cross-functional team effectiveness• Data availability and accuracy



Perceived Objectives and Benefits

• Competitive cost• Reliable quality and delivery• Overall supplier value



Myth No 1 - Commentary

“This strategy is the epitome of the two-edged sword. While applicable in certain situations it is the broad application of the consolidation strategy across the entire spend which is a major factor in the high-rate of e-procurement initiative failures.”

Procurement Insights May 28th, 2007



A detailed category strategy development process

• Doesn’t recognize the difference between a Historic Flat Line and a Dynamic Flux commodity characteristic (Acres of Diamonds Paper)

• Almost all traditional applications focus on Historic Flat Line commodity procurement

• Organizations often employ a “pull through” strategy to stimulate the savings associated with an underachieving initiative

• Significant emphasis on change management and buyer compliance



Historic Flat Line Characteristic• Floor $3,153• Institution (last buy) $3,096• Ceiling $3,699



Dynamic Flux Characteristic• Floor $552• Institution (last buy) $875• Ceiling $1,215



Cross-functional team effectiveness

• Procurement team is rarely engaged in strategy development in any meaningful way until after the fact

• Purchasing reduced to a functional versus strategic role• Stakeholder understanding is limited (or confined) to the

strategy champion (usually Finance or IT)• Stakeholder understanding rarely extends to include

external relationships (re suppliers)



Economical Technological User Suppliers

Low cost of ownership

Ease of integration with back-end ERP

Ease of use (Training & Support)

Ease of use

Good budget fit Reliability (Responsiveness)

Increased efficiency Non-invasive technology

Fast ROI (Productivity)

Minimal support requirement (Support)

Achieve performance objectives (Expedited Delivery)

Convenience and speed

Quantifiable savings re best value (Cost)*

Standardization Reliability Business intelligence

Flexibility Best “value” Real world visibility Maintain or increase revenue

Standardization Enhanced supplier engagement

Non-adversarial

*47% of purchases made on price (U.S.) and 50% made on price (Canada)Automotive Industry Buyer Survey 2004



Data availability and accuracy

• Process “patchwork” linked to most traditional ERP-centric applications (i.e. system workarounds, double entries etc.) – data capture methodology is questionable

• Most data is bound in static financial modules providing limited real-time access

• Inability to link data to the real-world processes that define an organization’s procurement practice



Case/Industry Reference

A.T. Kearney’s failed efforts to implement a similar strategy with the Government of Canada (GoC)

• Project ballooned from $1.7 million to $24 million in 7 months • Kearney recommendations alienated stakeholders both within and

external to the GoC (especially amongst suppliers)• Project ultimately scrapped by GoC• Consolidation strategy has been abandoned by an increasing

majority of organizations in both the public and private sectors (re 2002 and 2007 US Reports on contract bundling)



Category Strategy DevelopmentQuestions



Reference Material

Succeeding in a Dynamic World: Supply Management in the Decade Ahead

http://capsresearch.org/publications/pdfs-public/carterp2007es.pdf

Procurement Insights (Dangerous Supply Chain Myths – Part 1 of 7)

http://procureinsights.wordpress.com/category/supply-chain-myths/

Acres of Diamonds: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend

http://www.nigp.org/member/Source200607.pdf

http://capsresearch.org/publications/pdfs-public/carterp2007es.pdf

http://procureinsights.wordpress.com/category/supply-chain-myths/

http://www.nigp.org/member/Source200607.pdf



Myth No 2 – Supplier Development and Management

“Effective supplier development and management should deliver a competitive advantage in cost, quality, delivery/responsiveness, technology and innovation.”



Position Reasoning

• Improving the overall supply base and increasing value is critical to supply’s value proposition in the decade ahead



Critical Elements

• Establish supplier development strategy• Shrinking supply base• Building capabilities into the supply network• Gaining value from strategic relationships



Perceived Objectives and Benefits

• Competitive advantage in several key areas including cost, quality, delivery/responsiveness, technology and innovation



Myth No 2 - Commentary

“In segment 1 I reviewed the inherent risks associated with the broad application of a consolidation strategy. This was an appropriate starting point due to the fact that any adjunct undertakings that extend or branch out from this original “tree” will by and large fail”

Procurement Insights May 29th, 2007



Establish supplier development strategy

• The majority of strategies fail to ask the most important question, “do suppliers perceive your current e-procurement strategy as a threat or a benefit to their organization?”



What are suppliers saying . . .

“It (e-procurement – technology) will have a negative effect on my business”

“The product (we sell) is commoditized under an e-procurement program . . . We will do everything to resist participating”


Winning Strategies For Vendor Engagement

EconomicalEconomical TechnologicalTechnological UserUser SuppliersSuppliers

Low cost of Low cost of ownershipownership

Ease of integration Ease of integration with back-end ERPwith back-end ERP

Ease of use Ease of use (Training & Support)(Training & Support)

Ease of useEase of use

Good budget fitGood budget fit Reliability Reliability (Responsiveness)(Responsiveness)

Increased efficiencyIncreased efficiency Non-invasive Non-invasive technologytechnology

Fast ROI Fast ROI (Productivity)(Productivity)

Minimal support Minimal support requirement requirement (Support)(Support)

Achieve performance Achieve performance objectives objectives (Expedited Delivery)(Expedited Delivery)

Convenience and Convenience and speedspeed

Quantifiable savings Quantifiable savings re best value re best value (Cost)*(Cost)*

StandardizationStandardization ReliabilityReliability Business Business intelligenceintelligence

FlexibilityFlexibility Best “value”Best “value” Real world visibilityReal world visibility Maintain or increase Maintain or increase revenuerevenue

StandardizationStandardization Enhanced supplier Enhanced supplier engagementengagement

Non-adversarialNon-adversarial

*47% of purchases made on price (U.S.) and 50% made on price (Canada)*47% of purchases made on price (U.S.) and 50% made on price (Canada)Automotive Industry Buyer Survey 2004Automotive Industry Buyer Survey 2004



Shrinking supply base

• ISM, CAPS and Kearney report’s findings that further reductions of 51% of direct goods suppliers and 77% of indirect goods and services contradict both sound practice and emerging trends.



“Although contract bundling can serve a useful purpose, the effect of this increase in contract bundling over the past ten years cannot be underestimated. Not only are substantially fewer small businesses receiving federal contracts, but the federal government is suffering from a reduced supplier base. American small businesses bring innovation, creativity, competition, and lower costs to the federal table. When these business are excluded from federal opportunities through contract bundling, our agencies, small businesses and the taxpayers lose.”

Contract Bundling: A Strategy for Increasing Federal Contracting Opportunities for Small Business, October 2002

Executive Office of the President, Office of Management and Budget, Office of Federal Procurement Policy



“Referred to as a major and growing bonanza for small business firms, particularly those run by veterans, women and minorities, the data indicates that a dramatic shift in favor of small business . . . Has put them back on top of much of the federal contracting world.”

Five Emerging 2007 Small Business Federal Government Contracting Trends to Watch, April 2007

Synchris, epipeline & Set-Aside Alert



“The second is an actual reverse of a recent trend whereby more big federal contracts will be unbundled for small contractors. Initiatives by agencies such as NASA, whose breaking up of a number of their mega-contracts into more manageable opportunities for small businesses and small business teams, is an example of how the new shift to smaller contractors will take place.”

Five Emerging 2007 Small Business Federal Government Contracting Trends to Watch, April 2007

Synchris, epipeline & Set-Aside Alert



Building capabilities into the supply network

• Built on the questionable foundation of vendor rationalization, supply base capabilities are going to be significantly limited.

• A serious byproduct of the resulting compromised capacity, is that organizations will struggle to compete both domestically as well as globally.



What is Globalization?

It is the “systematic reduction in barriers to the cross-border flows of capital, labor, products, technology, information, belief systems, ideas and values.”

It is the “liberalization of international movement of goods and services, financial capital, and human capital.”

Globalization and Cluster-Based Development, May 2006Foundation for Advanced Studies on International Development (FASID)Seminar Sponsor: Asian Development Bank Institute (ADB)



Global Perspective

• The development and upgrading of clusters is an important agenda for governments, companies, and other institutions

• Cluster development initiatives are an important new direction in economic policy

• Builds on earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing business

Harvard Business SchoolInstitute for Strategy and Competitiveness



Gaining value from strategic relationships

• The term strategic relationship is a misnomer when true stakeholder understanding is absent from an organization’s core strategy.

• The true measurement of stakeholder understanding is directly linked to the “level” of a change management undertaking including buyer compliance.



Of the 45% of U.S.-based customers who have contracted vendors, 33% of all purchases were from non-contract suppliers. In Canada, this number ballooned to 79%. Is this a compliance (or non-compliance) issue, or is it the result of a questionably conceived, broadly applied consolidation strategy?”

Procurement Insights, May 29th, 2007

(Referencing a 2004 PTDA Industry Study)



Case/Industry ReferenceCovisint

Creating the technology to operate such a marketplace (Covisint) turned out to be more difficult than expected, while suppliers remained hesitant to compete for business online.

c/net, December 2003

Covisint has also come to be considered a failure across the auto industry.

c/net, August 2004



Case/Industry ReferenceCommonwealth of Virginia

• The Commonwealth’s supply base grew from 20,000 in 2001 to 34,000 in 2007

• A dramatic increase in business distribution over the entire supply base – where 6,000 of 20,000 suppliers received orders in 2001, 14,756 of 34,000 suppliers received orders in 2007 (up to August).

• A significant increase from 1% of total identified spend ($3.5 billion) being processed through eVA in 2001 to approximately 80% in 2007

Yes Virginia! There is more to e-procurement than software Procurement Insights Posts Sept 12 & 20, 2007



Supplier Development and Management

Questions


Dangerous Supply Chain MythsReference MaterialProcurement Insights (Dangerous Supply Chain Myths – Part 2 of 7)http://procureinsights.wordpress.com/

Contract Bundling: A Strategy for Increasing Federal Contracting Opportunities for Small Business,October 2002Executive Office of the President, Office of Management and Budget, Office of Federal Procurement Policy

Five Emerging 2007 Small Business Federal Government Contracting Trends to Watch, April 2007Synchris, epipeline & Set-Aside Alert

Globalization and Cluster-Based Development, May 2006Foundation for Advanced Studies on International Development (FASID)Seminar Sponsor: Asian Development Bank Institute (ADB)

Harvard Business SchoolInstitute for Strategy and Competitiveness

Yes Virginia! There is more to e-procurement than softwareProcurement Insights Posts Sept 12 & 20, 2007 http://procureinsights.wordpress.com/

http://procureinsights.wordpress.com/

http://procureinsights.wordpress.com/

Seminars and Conferences with Jon Hansenhttp://procureinsights.wordpress.com/seminars-and-conferences-with-jon-hansen/

As you will see from the following small sample of references, they clearly demonstrate Jon’s ability through his conferences to identify, structure and disseminate the ideas and visions that are reshaping supply chain practice globally. “Jon’s extensive experience and drive to enhance the Supply Chain Industry was refreshing. As an attendee of his seminar on “Dangerous Supply Chain Myths” as well being an instructor at Centennial College I was able to learn from Jon many real life examples that he surpassed and share them with my students bringing a more realistic approach balancing theory to practice in the Supply Chain world. Jon made it clear that the Supply Chain industry is much more complex and generalizations are a thing of the past. He described multiple ways for Supply Chain Professionals to express the necessary changes needed in order to present to Senior Management the requirements for cost savings to the bottom line. Overall his seminar was very informative, interactive and armed the attendees to back their existing roles at work to pursue Supply Chain excellence.”Sal Nazarali C.P.P. “Jon provided a well researched seminar. His seminar was both informative and thought provoking. He was able to draw out a good discussion on all points he was trying make. I would not hesitate to attend any seminar presented by Jon.”Top Qualities: Personable, Expert, Creative Joe Corbitt, C.P.P.

“I was very impressed with Jon’s presentation style, in depth knowledge, his ability to make and keep us interested in the subject as well as his interaction with all members of our group. I recommend Jon very highly.”Top Qualities: Great Results, Expert, CreativeBrigette Durrant, C.P.P.

http://procureinsights.wordpress.com/seminars-and-conferences-with-jon-hansen/

dangerous myths series (excerpt)

Entertainment & Humor

supply base

overall value chain

supply management organization

similar strategy

consolidation strategy

strategy champion

procurement insightsmay

suppliers pro