Early to Bed, Early to Rise, Work Like Hell and....Customize?

An invigorating article on Reuters.com Tuesday about Honda's decision to NOT STANDARDIZE components across global auto models. In a strategy guaranteed to drive procurement puritans to drink, Japan's No.2 automaker will develop unique specifications for each of the seven countries where the next generation of the Fit sub-compact will be built and sold. Honda's purchasing head Masaya Yamashita reveals the primary drivers of the bold new sourcing strategy to be country-specific requirements and new design ideas from local suppliers.

The concept of customizing product specifications to the requirements of unique market segments is not new. The issue has always been how to manage purchasing, manufacturing and supply chain costs while doing so. The argument is that unchecked growth in specification variation works against all the traditional drivers of supply chain cost reduction such as purchasing leverage, inventory investment and set-up cost. So is Honda out to lunch with its sourcing approach for the new Fit? No, the company is just adopting the broader view of total cost of ownership to include the benefits of better tailoring the product to end consumer requirements and also down-specifying certain requirements based on country-specific usage environments.

In addition to just making sense I find the Honda article extraordinarily refreshing. Having been around the supply chain block for a few years now I know only too well how easy it is to regard certain strategies and practices as a perpetually and universally applicable best practice. A paradigm. Like any paradigm it makes you feel safe and comfortable, like you'll always have the answer. Thank you Honda for reminding us that paradigms are there for one reason - to break.

Lessons from the Public Sector

I'd like to welcome back to 1 Procurement Place guest blogger Barnali Dasverma. Barnali is a Manager at Treya Partners and has an interesting point of view about where the private sector can look to learn some lessons about improving the effectiveness and efficiency of procurement processes. Some of you may be surprised by Barnali's viewpoint, but then others may not....

Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector

By Barnali Dasverma
Manager, Treya Partners

“Yikes, what a haphazard sourcing process! You would never see this in the public sector!” Believe it or not, this was an observation I made after beginning my first private sector consulting engagement following a series of public sector clients. I was startled to come to the realization that there’s quite a bit the private sector can learn from the public sector. I’ve subsequently had the opportunity to serve more private sector firms and additional state governments and have had this conclusion reaffirmed. Specifically, my experience suggests there is a remarkable amount of structure and discipline in public sector procurement that many mid-market firms can greatly benefit from.


Bureaucracy Has Its Benefits: Processes

Bureaucracy has its benefits (as a consultant frequently engaged to tackle bureaucratic inefficiency, am I even allowed to say that?) and process standardization is one of them. One key public sector procurement practice the private sector can benefit from is a standardized RFP process. Many mid-market firms with unsophisticated procurement departments have an inconsistent approach to RFPs – each procurement staff member has his or her own RFP style and each procurement is run differently based on who leads it. In contrast, state governments typically have a well-defined multi-step process that everyone must follow, newbies and old-timers alike. If you’re a mid-market CPO working to optimize your procurement operations, begin with putting in place a consistent, best-in-class RFP process. Conduct vendor and industry analysis as a critical first step, call for requirements gathering that includes the alignment of specs with needs, require that all high profile procurements have a pre-proposal conference to obtain supplier feedback early on, have cost and non-cost proposals be scored by different evaluators to facilitate unbiased decision-making, and require that the procurement lead serve as single point of contact to limit the flow of information to suppliers. By formally requiring that all RFPs include best-in-class steps like these, you will ensure that your procurements are consistently exceptional.

This Is How We’ve Always Done It: Templates

While “this is how we’ve always done it” is a frequent refrain in state government and rarely music to a consultant’s ears, there is something to be said for not always reinventing the proverbial wheel. Far too often, we come across fledgling procurement departments in the private sector that whip up a new RFP whenever a procurement need arises, patching together portions of old RFPs to the extent possible, with the end result being a messy, incoherent solicitation document. Significantly, state government procurement departments are quite different in this regard and typically have contract and RFP templates (“boilerplates,” as they are often called) that all contracting officers must use. A powerful way to increase the efficiency and consistency of an unseasoned procurement team is to invest the time and effort in developing best-in-class templates for RFPs, RFIs, contracts (including standard terms and conditions that have been approved by your legal department), negotiation materials, and the like. Design the templates with usability in mind, carefully noting which portions must be tailored for each new procurement and which ones can be leveraged with little to no tweaks.

You Can’t Break the Rules Without Having Any: Policies

While procurement rules and regulations are sometimes followed blindly in government when they should in fact be challenged, they serve a valuable purpose and many private sector entities can benefit from them. Specifically, well-defined, and clearly communicated (and needless to say, best-in-class) procurement policies help minimize the gap between the CFO/CPO-level vision and the operational reality. For example, procurement policies defining delegation thresholds ensure that procurement staff members’ limited time is not spent on low-dollar value procurements, while requirements that procurement be involved in all RFPs of a certain contract value make sure that an organization reaps the benefits of having a high level of spend under management (e.g. application of strategic sourcing techniques to a broad range of spend categories, monitoring of supplier performance and internal contract utilization, etc.)

Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two

Having served as a consultant to six different state governments, I can tell you there are numerous ways in which the public sector can learn from the private sector – but that said, my experiences as a procurement consultant have taught me that it’s a two way street. Without a doubt, the structure and discipline we find in state government procurement is most certainly something that many of our mid-market clients can use.

Trial by Tabloid in Motor City

The Detroit News reported recently how the city's Chief Procurement Officer Andre DuPerry is looking to shake up Motown purchasing by re-examining the preferences Detroit businesses are given during the contract process. DuPerry, appointed by Mayor Dave Bing in December 2009, believes the city could save $22M a year by addressing Detroit's dependence on local third-party companies that charge inflated rates. Two small distributors, T&N Services and Hercules, receive particularly harsh treatment in the article for selling the city everything from office supplies to toilet paper to cleaning services at apparently outrageous markups. T&N CEO Tyrone Talifer understandably defends his company's position, citing as an example the taxes paid by his employees that flow back into the city's coffers.

I have to admit my very first take on reading this article was "go get 'em Andre!" but on reflection I would say T&N and Hercules get shabby treatment in the piece. Can they really be blamed for selling products and services at prices that the market will bear? Is it their fault they've been given the opportunity to operate in an industry structure with weaker competitive forces than those faced by my daughter's lemonade stand? Of course not. The primary driver of the margin extracted by both companies is the local vendor preference policy set in the city's purchasing ordinances. The "felon caught in the flashbulb glare" picture of Hercules President Belinda Jefferson is tawdry journalism, disrespectful of all small business owners who navigate the unpredictably contoured landscape of the monthly cash flow statement.

Now, do I have any problem with DuPerry seeking to drop strategic sourcing depth charges into the still, glassy waters of Detroit's overprotected contracting environment? Heck no! Go for it Andre! The sky high prices paid by Motor City's government typify public sector contracting policies where the protectionism dial's needle has swung way into the red. By all means, get some contracting best practices in place to make the government's scarce budget dollars go further. Leverage the total city spend with national suppliers, negotiate aggressive volume-based discounts & rebates, and implement compliance management measures to ensure government departments use the new agreements. Oh and guess what? It will actually be possible to maintain a targeted level of spend with your city's local suppliers by either setting aside a (sensible) portion of annual requirements for SWMBE vendors and/or requiring that the national providers subcontract a minimum percentage of annual requirements to SWMBE (I'd recommend a combination of both). And with the improved reporting available from today's electronic procurement and contract management systems it will be easy to validate that the big guys are actually fulfilling their contractually committed obligations to Detroit area businesses.

So to repeat, I have no beef with CPO DuPerry setting about his business as city procurement tsar and mending broken public sourcing practices. My only beef is with those who place blame at the feet of the benefactors of these broken sourcing practices.

So Motown, go get the savings dollars and squeeze those markups! Protect local area businesses through best practice strategies such as minimum SWMBE quotas and setting and enforcement of SWMBE subcontracting targets with national suppliers. And T&N and Hercules - get ready for real competition that will initially hit your bottom line but in the long run will transform the efficiency of your operations and create real value for you going forward. And to those media commentators looking for the easy sound bite, show a little respect for those industry participants making hay while the sun shines. As far as the economy is concerned it's like living in New England - enjoy the weather now but wait around another 15 minutes and you'll be scrambling for your coat and umbrella.

The Art of Clanger Avoidance

If you're a consultant - or you've hired consultants - you've probably heard the expression "nobody ever got fired for hiring the Big 6". The idea is that if a big name consulting firm drops a clanger on a client engagement then the person responsible for bringing them in can't really be blamed because I mean, how often do these guys screw up? We must just be unlucky! If a boutique is selected however and something blows up then the hiring individual is likely to be tarred and feathered for leaving the company's valuables in the care of a bunch of fly-by-nights who obviously didn't know their pivot tables from their pyramid principles. Interestingly I was speaking to a grad school buddy of mine just last week who recently left one of the big firms (to go open a beach bar, go figure...attaboy!). He was telling me how a few weeks before he left, he was part of a large team helping a software company shorten their product development cycle, respond quicker to changes in customer needs, and generally become more nimble in the marketplace . To cut a long story short the client ended up firing my friend's firm because they weren't able to respond quickly enough to issues that arose during the project and changes in direction the client wanted to make in scope and approach to address these issues. I thought this ironic (and not a little funny) since the firm had obviously sold itself as being able to help this client turn, spin and triple flip on every dime that came its way. Should they have considered a smaller consulting firm that was more likely to be eating its own dog food when it came to nimbleness and flexibility? Or did that seem too far to extend the neck when the comfy cushions of big firm security were within easy reach? Who knows, sometimes it's not that simple. There are certainly plenty of examples out there of big firms that have successfully oared their clients through rapidly changing currents. It does make me think though that companies looking to hire consultants for engagements that intrinsically are most likely to encounter unexpected pockets of mid-air turbulence should apply considerable weight to evaluating the candidates' abilities to guide their clients through a project's occasional bumpy moments to a smooth landing. Lengthy chain linked methodologies are the ones I've seen most often get wrapped around the axle of a less than smoothly unfolding project work plan. Look for pragmatism, flexibility, a willingness to reconsider the last few steps taken and adjust course if some new data suggests that might be the wisest move. Worried about that small firm risk? Ask for a few more references than you would the big guys to quiet your concerns. Unless of course those Big 6 cushions are looking too comfy....Hey, you want an easy life? I know a beach bar owner who needs a partner....

Plane Wrong

"You don't own that plane, the tax payers do!"
- Top Gun, 1986

In his Toronto Star piece $16 billion for the wrong planes Michael Byers writes how the Canadian government last week sole sourced 65 F-35 fighter jets from Lockheed Martin at $135 million per plane, avoiding a tender process that would have drawn bids from other domestic and foreign companies including Boeing, Eurofighter and Saab. The sole source decision was justified on the basis of what Byers describes as "ridiculously narrow operational requirements" based not on Canada's unique air defense procurement needs but on "...instructions from the Pentagon". In addition to his general argument that the sole source decision has resulted in Canada's taxpayers paying too much money for the wrong aircraft Byers also makes the point that some of the $16 billion could have been invested in other high need areas such high speed rail for the Toronto-Montreal-Ottawa corridor.

Michael obviously feels strongly about this issue and I can see why. It's a classic example of public sector procurement decisions being made wholly on political rather than technical or commercial considerations. But let's check our naivety at the door for a moment and smell the coffee while we're at it - the fact of the matter is that the US and Canadian aerospace industries are joined at the hip AND the wallet. The two countries represent over 50% of each other's aviation exports and imports so to all intents and purposes their aerospace companies conduct business and catch each other's colds as if under one flag. Consequently major equipment buying decisions are going to be inextricably linked to the impact of that decision on one or both of the two countries' aerospace industries. Were Canada to opt for Europe's Typhoon this would not only take a lead pipe to Lockheed Martin's knees but would severely wind a large number of the US defense contractor's Canadian supply base at the same time. So it's the F-35 boys! Even if it does mean running on fumes over the Arctic, tearfully fingering the family photo tucked into your cockpit windshield frame while a Hercules mid-air refueling tanker attempts to cover the 2000-odd miles from Vancouver before your nifty but short range jet runs out of gas over that rather uninviting ice flow below.

So what's a sourcing idealist to do? Well, start by realizing there are going to be times when political or other equally unsavory decision criteria trump your carefully constructed total cost of ownership evaluation model and MOVE ON. Next, introduce some best practice supply risk management principles to counter the impact of the award decision from hell. In the case of the F-35, for example, the Canadian Air Force could implement modified operating procedures to ensure that the shorter range aircraft always operates within a safe distance of mid-air refueling capability. Additionally the plane's range could be extended by retrofit mods such as external fuels tanks, lighter weapons packs, or other configuration modifications that in some cases will produce performance tradeoffs but that will ultimately serve to mitigate the negative impact of the original, technically flawed, sourcing decision.

Whether buying planes or pencils there will be times when the procurement professional's best laid sourcing plans run foul of political exigency or special interests. Don't cry over your spreadsheets at times like these but show the talking suits the right stuff you're made of. Whip out that risk mitigation plan. Look for ways to shield your internal customers from the potential fallout of a bad sourcing decision through outstanding supplier management.

And always carry an extra tank.

Relax? Don't Do It for Competitive Advantage

In the 1982 Boston Marathon, world record holder Alberto Salazar outsprinted fellow American Dick Beardsley to win the "Duel in the Sun", one of the most memorable races in marathon history. Interviewed years later Beardsley said his undoing had been "taking a breather" immediately after he and Salazar had negotiated notorious Heartbreak Hill, the last of the four Newton hills just four miles from the finish of the grueling Boston course. Beardsley recounted how he glanced to his side as the two men crested Heartbreak and saw his rival coasting down the hill, obviously recovering after the tortuous climb through Newton. Beardsley likewise "eased off the gas" in his words until the two men reached the bottom of the grade. At that point both runners kicked up the pace and began the frenetic two mile sprint through downtown Boston that culminated in Salazar pipping Beardsley at the tape in Copley Square. In his interview Beardsley told how in hindsight he should not have relaxed after scaling Heartbreak Hill but should have kept his "foot on the pedal". By doing this Beardsley believed he would have built an unassailable lead on Salazar and would have won the duel in the sun.

Would history have been different if Beardsley had kept his foot on the gas? We'll never know. It does however conjure up an interesting parallel with today's economic landscape and, specifically, the reactions of different business organizations to changes in this landscape. For example, throughout this most recent economic downturn supply chain executives in private sector companies have faced tremendous pressures to protect profits in the face of falling sales through the aggressive pursuit of reductions in all supply chain-related costs. In the public sector it has been a similar story as state governments, faced by steeply declining tax revenues, have needed to drastically curtail expenditures on many state programs. During this period numerous supply chain organizations have delivered outstanding cost savings results that have helped companies stay profitable and states avoid the need to eliminate many essential government services. These success stories have been due to the effective implementation of a broad range of supply chain best practices including strategic sourcing, demand management, and process improvement to name just a few.

As we emerge from this recession and rebounding customer demand eases margin concerns it would be natural to assume that organizations could safely "ease back" on the cost reduction pedal (just as Beardsley did after Heartbreak Hill) and redirect effort towards the customer-facing activities that impact quality and service. Companies making this assumption, however, may be missing a golden opportunity to achieve unassailable competitive advantage over their competitors. By continuing to apply cost management best practices during economic growth periods a company could potentially accelerate away from its competition in terms of operating margin performance. The company with superior operating margin will, through its increased contribution to retained earnings, be able to invest a greater proportion of its revenue in product development activities. Since product development dollars as a percent of sales is a metric that has been empirically associated with share and profitability growth, any strategy that accelerates a company's operating margin advantage relative to its competitors will also accelerate its overall competitive advantage in the marketplace. By keeping firm post-recession pressure on the cost management pedal an organization gives itself an excellent chance to build a healthy lead over its less enlightened competitors in all key areas of strategic, operational and financial performance.

Likewise, public sector entities can also enjoy the benefits afforded by a continued focus on cost management in the post-recessionary period. State governments with procurement departments that maintain a strong strategic sourcing focus, for example, will be able to do "more with less" and expand the reach and effectiveness of their current programs and services without the need to automatically increase tax revenues.

Just as Dick Beardsley can never be certain that doing things differently would have secured him the Boston Marathon in '82, no company can take any business strategy to the bank until events have played out. Numerous other bumps in the road can rise up and unseat the surest rider. But by placing bets on strategies that have empirically yielded superior returns - and those based on maximizing product development investment fall into this category - you will undeniably reduce the probability of ever having to look back and regret your own lost duel in the sun.

No Baseline? The Joke's On You.

A consultant walks into a store and asks the clerk "I need to buy a sourcing project for my client please".

"Certainly sir" replies the clerk, "do you need a low, medium or high complexity project?"

"A medium one please" the consultant replies.

"You're in luck, we have one medium project left. It'll do most indirect categories plus a few direct ones as well. Includes a project manager with minimum five years experience plus all the usual tools, templates and work products. "

"Sounds perfect - how much?" the consultant asked.

"Fifty thousand plus tax" the clerk replied, "not including baseline."

"Baseline?" the consultant queried, looking puzzled, "what's that?"

"You'll need it to measure your savings" the clerk answered, "most customers are asking for that these days."

"Hmm, well how much extra is the baseline?

"Another eight thousand, sir"

The consultant thought about it a moment then shook his head. "No it's okay I'll pass. Just the project, please."

"Are you sure, sir?' the clerk challenged, "you won't know what your savings are".

"It's okay" the consultant smiled back, "when I've completed the sourcing I'll present a fact-based case to the client and we'll mutually agree on the savings that I've created."

"And that actually works does it, sir?"

"I'm sorry?" the consultant responded, affronted by the clerk's gall. "What do you mean?"

"Pardon me, sir" the clerk quickly replied, "no offense, but do you always end up capturing credit for exactly 100% of the savings you believe you have created?"

"Well of course not. As I said, I mutually agree on the savings with my client"

"I see. Do you mind if I ask you a question, sir?

"Sure, go ahead." The consultant could see where this was going. This kid was pulling out all the stops trying to sell him this baseline thing. He'd probably be telling him these sourcing projects weren't made like they used to be. That they'd fall apart in the first couple of months without a baseline. He decided to do the decent thing and let the clerk deliver his scripted lines.

"How much savings did you create in your last sourcing project?"

"That's easy. I saved 14% on ten million dollars of small parcel freight."

"And was this a benefits-funded engagement, sir?" the clerk asked further.

"Well yes it was, actually" the consultant answered, adding with pride, "I invoiced for 25% of the savings. A cool $350,000."

"Nice, sir." the clerk congratulated, "and the 14% was the mutually agreed savings amount was it?"

"Well yes, of course" the consultant confirmed, "like I said before, I presented a fact-based case at the end of the project and after going over the numbers we agreed on the 14%."

"If I may ask, sir" the clerk ventured, "what savings number did you originally present to you client prior to the, um, mutual agreement?"

The consultant fell silent a moment, surprised by the clerk's question. Where was he going with this? Deciding to go with the flow he replied truthfully "I originally presented 21% savings to the client. But that's irrelevant. I knew I'd have to negotiate a bit with him to settle on a number we both agreed on."

"Sir, would you mind if I asked you two more questions before you make a final decision on buying the baseline?" the clerk asked.

"Oh sure, go ahead" the consultantreplied. "What can it hurt?" He just wanted to get out of here with his sourcing project. This guy was starting to sound a bit too much like the Best Buy checkout clerk who holds you hostage until you agree to buy the extended warranty on your x-box.

"Firstly, would you consider a $175,000 return on a $8,000 investment a good ROI?"

"Well, of course!" the consultant answered easily, but somewhat warily. For some reason he suddenly felt like a helpless jungle-living insect about to get lured into a huge spiders web on one of those Sunday evening shows on Discovery Channel.

"Excellent. So my last question relates to the project you described, sir. Specifically to the original savings number you presented to your client."

"Okay - what is it? What's the last question?" Enough already, thought the consultant. I ain't no celebrity but get me out of here anyway.

"Do you think you were right?"