supply chain management as a driver of world-class...

10/22/2012

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Supply Chain Management as a Driver of World‐Class Performance

Robert A. RudzkiPresident of Greybeard Advisors Former Fortune 500 CPO

Robert A. RudzkiRobert A. Rudzki, a former Fortune 500 financial and procurement executive, is President of Greybeard Advisors LLC (www.GreybeardAdvisors.com). Greybeard is a firm comprised of deeply-experienced industry executives and managers. Since its formation 7 years ago, Greybeard has become a leading provider of advisory services for procurement transformation, strategic sourcing and supply chain management. In that role, Mr. Rudzki has personally been an advisor to some of the leading companies in major industry sectors. g p j y

Prior to founding Greybeard Advisors in 2004, Mr. Rudzki served as Senior Vice President for Bayer Corp, the North American subsidiary of Bayer AG. At Bayer, he led a nationally-recognized transformation that generated significant improvements in costs and working capital, and was a finalist for Purchasing Magazine’s Medal of Excellence. Prior to Bayer, he was an executive at Bethlehem Steel Corp., where he oversaw Bethlehem’s global procurement and logistics activities. During his tenure, Bethlehem’s procurement organization was recognized as "top quartile" in a global benchmarking study conducted by A.T. Kearney, and was also twice recognized by Purchasing Magazine as a "Best Place to Work."

A frequent speaker at conferences, Mr. Rudzki is lead-author of two books: the l t b t ll St i ht t th B tt Li ® d it l N tsupply management best seller Straight to the Bottom Line®, and its sequel Next

Level Supply Management Excellence.

Mr. Rudzki graduated summa cum laude from Lehigh University (B.S. Industrial Engineering), and earned an MBA from The Wharton School.

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A Few Critical Questions

H N A i b i h f il d d i hHow many N. American businesses have failed during the past 10 years?What is the “life expectancy” of corporations?How do you determine if your organization is already among the “walking wounded?”

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The Startling Reality

More than 600,000 N. American businesses filed for bankruptcy in a recent 10 year periodrecent 10 year periodSeveral studies have concluded that the life expectancy of corporations is less than 50 yearsMany of today’s “profitable” businesses gradually are liquidating themselves by not earning cost of capital (they are already the “walking wounded”)

Lacking active intervention, most companies will inevitablyfail, for a variety of reasons.

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Outline

What really is “transformation?”Linking supply management transformation to top management’s interests and objectives The opportunities possible with world-class supply management and how to create awareness and excitement among your top managementKey elements of a successful transformation roadmap Final thoughts on getting senior management’s attention g g g gLeadership success factors

My perspective: Former CPO who led successful transformations at major companiesAdvisor to CPOs who want to build the business case for change Advisor to companies that are on the transformation journey

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Transformation – a Key to Success

“Transform” – to change in composition, structure, character or condition, to change the outward form or appearance (source: Webster’s Dictionary)

OR“Transform” – to fundamentally alter the capabilities and improve the achievement of results (source: Greybeard Advisors)

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Rationale for Change“When something has been done a particular way for five years, it is a pretty good sign, in these changing times, that it is being done the wrong way.”y

Elliott M. Estes, General Motors (approx. 1975)

“Insanity is doing the same thing, over and over again, and expecting different results.”

Anonymous

“When the rate of change inside an organization is less than the rate of change outside, the end is in sight.”

Jack Welch, former CEO, GE

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A Key Question: Transform to What?

Role Tactical Strategic

Organizational Level Back Office, Transactional Executive – “Seat at the Table”

Metrics of Success Meeting headcount objectives, transactional efficiencies

Revenue enhancement, cost reduction, working capital, etc.

Skills Paper processing, clerical, …Leadership, cross-functional, cross-cultural, strategic, analytical …

Career Path LifetimeCandidates for high-potential job rotations thro gho t theCareer Path Lifetime job rotations throughout the company

Job Content Boring, repetitive Creative, big impact, fun

Other Lone ranger Team player, strategic business partner

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Outline

What really is “transformation?”Linking supply management transformation to top management’s interests and objectives The opportunities possible with world-class supply management and how to create awareness and excitement among your top managementKey elements of a successful transformation roadmap Final thoughts on getting senior management’s attention Leadership success factors

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Return onInvested Capital

ImprovesImproves

ROIC = Earnings / (Equity + LT Debt)ROE = Earnings / EquityRONA = Earnings / Net Assets

Supply Management has Unique Position within Company to Impact ALL Four Drivers of ROIC

Capital Intensity

(Invested Capital)Profits Cash

Flow

p

Improves Improves

Enhance

WORKING CAPITAL related:REVENUE related:• Faster new product design & development

Enhance

• Improve payment terms with suppliers• Utilize inventory programs with suppliers

p g p• Optimum & reliable parts & raw materials suppliers• Excellent transportation service providers

COST related:• Reduce freight costs & claims• Reduce direct & indirect materials/services costs• Reduce manufacturing variability

CAPITAL EXPENDITURE related:• Improve redeployment of used assets

(“asset recovery” programs)• Reduce total costs associated with capital spending

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Supply Management is a Compelling Priority

Levers Difficulty in Executing

Sourcing/SupplySourcing/Supply Mgmt Low–Moderate

Product cost out Moderate

Labor productivity Moderate

Selling price High

Market share gains High

Salary/Benefits High

Approached properly, materials and services represents a large opportunity for margin improvement and increased cash flow

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Outline


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What is Possible in Revenue Support?

Example: new product/service development cycle time

• Impact of reducing the cycle time and manufacturing costs • Beat your competitors to market• Improve your competitive standing and win new sales

Some companies involve procurement and other internal functions –p pplus prospective suppliers – in an aligned effort to create competitive advantage.

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Examples of What Is Possible in Cost Reduction Using True Strategic Sourcing as One Part of a Comprehensive

Transformation Plan

Category Benchmarks

Raw / Direct Materials 5 to 10 % & Better Risk Mgmt5 to 10 % & Better Risk MgmtRaw / Direct Materials 5 to 10 % & Better Risk Mgmt.5 to 10 % & Better Risk Mgmt.Packaging 10 to 20 %10 to 20 %Indirect Materials and Services 10 to 30 %10 to 30 %

Information Technology 15 to 40 %15 to 40 %Professional Services 8 to 15 %8 to 15 %Logistics/Transportation 7 to 15 %7 to 15 %Media, Marketing, Promotional Items 10 to 20 %10 to 20 %Other Indirects 5 to 15 %5 to 15 %Capital Projects 7 to 15 %7 to 15 %

Source: Various benchmarks, Greybeard Advisors experience database14

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What’s Possible in Cost Reduction - The Math Often Surprises Senior Management

Hypothetical manufacturer:

Direct Materials purchases: $ 1.0 billionassume 5 % cost reduction: $ 50 million step

change in cost structure

I di t M t i l & S i $ 0 5 billiIndirect Materials & Services: $ 0.5 billionassume 15 % cost reduction: $ 75 million step

change in cost structure

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What’s Possible in Working Capital?

Payment terms:Payment terms:

From ToNet 30 days Net 45 – 1% - 15 or better30 – ½ % - 10 Net 45 – 1% - 15Net 45 days Net 60 – 2% - 20

Approached properly, a 60 to 75% conversion success can often be achieved in a first-round campaign.

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The Value of Changing Payment Terms

Example:

For each $ 100 million of annual purchases, moving from Net 30 days to 45 - 1% - 15 offers your company the option of:

• (a) improving earnings by about $ 1.0 million/year (minus the interest earnings on the cash used to pay early), or

(b) the ability to grow Accounts Payable and Cash balances by• (b) the ability to grow Accounts Payable and Cash balances by about $ 4.0 million by paying in 45 days instead of 30 days.

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What’s Possible in Capital Project Procurement? Ultimate project costs are influenced by the stage at which procurement and

suppliers become involved in a project.

$ ultimateproject costs

Concept Design Initial Supplier BiddingStage Stage Discussions

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Audience Poll• In our organization, “supply management” and “procurement”

have a truly strategic role; they are involved early, and strategically, in all of the following:

• revenue enhancement and new product developmentrevenue enhancement and new product development• all areas of cost management (i.e. there are no sacred

cows)• working capital initiatives• capital expenditures

– Strongly Agree (5)– Agree (4)– Neither Agree nor Disagree (3)– Disagree (2)– Strongly Disagree (1)

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Outline


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Management Guru C.K. Prahalad Always Told Executives to Think Big

“Set ambitious goals and then figure out how to mobilize the resources to achieve them – rather than the other way around.”

“Most companies limit themselves because they focus primarily on what they believe they can afford.”

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This is the difference between an “opportunity-centric” approach, and a “budget-centric” approach.

Conventional “Sourcing Programs” Alone Often Fail to Sustain Their Initial Results

“Without real procurement transformation, only 60% of the value of procurement initiatives are retained by year two. This value drops by 10% for each subsequent year.”

$ B

enef

its

Supply Management Transformation – significant, sustainable, growing results

WHY the

Difference

Years

“Quick Win” Sourcing Programs– initial results often fade over time

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?

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Supply Chain’s Role

Achieving World-Class Sustainable ResultsRequires Attention to Transformation Initiatives

Across Six Key Dimensions

ObjectivesBest Practices

Innovation &

Good

$

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Optimized Organization

& Technology

Leadership

Excerpted from the books: “Straight to the Bottom Line®” and “Next Level Supply Management Excellence”

The Complete Supply Management Organization(The Effects of Missing a Critical Dimension)

Strategic Role Objectives Leadership Optimized

OrganizationBest

PracticesEnabling

Technology

Successful&

Sustainable=

CRITICAL SUPPLY MANAGEMENT DIMENSION EFFECT on ORGANIZATION

Missing or Tactical Role

Objectives Leadership Optimized Organization

BestPractices

EnablingTechnology

Organizational Confusion

Strategic Role Missing Leadership Optimized

OrganizationBest

PracticesEnabling

Technology Incorrect Focus

Strategic Role Objectives Missing Optimized

OrganizationBest

PracticesEnabling

TechnologyDiscouraged Associates

f

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Strategic Role Objectives Leadership Missing Best

PracticesEnabling

TechnologyPerformance

Anxiety


Organization Missing EnablingTechnology

Frustration – ErraticResults


OrganizationBest

Practices Missing Inefficiencies –Compliance Issues

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Constructing the Transformation Roadmap

Arrange for a candid and comprehensive comparison of “Current state” at your company vs supply management and procurementstate at your company vs. supply management and procurement “Best practices”Gap analysis helps to identify and quantify opportunities, and prioritize initiativesSequence the roadmap elements so that they build on each other – this is part Art, and part Science Done poorly, it can be the reason for “evaporating results”D ll th d ill t t i bl lt dDone well, the roadmap will create sustainable results and momentum, and build organizational capabilities – and support -that drive superior performance

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Timeline in Months from Start1 – 6 months 6 – 12 months 12 – 24 months 24 – 36 months

RoleRole

A Comprehensive and Tailored Transformation Roadmap Is Developed across Key Dimensions

ObjectivesObjectives

Practices & ProcessesPractices & Processes

LeadershipLeadership

Optimized Optimized OrganizationOrganization

Enabling TechnologyEnabling Technology

Detailed Roadmap Elements forAll Dimensions, Across All TimePeriods, Should be Tailored tothe Client’s Current State

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Communications Communications ––InternalInternal

Communications Communications ––ExternalExternal

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Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6

Greybeard’s Six – Phase Strategic Sourcing Process

Our Strategic Sourcing and Negotiations Management Training is Comprised of Process and Tools, Combined with

On-the-Job Coaching and Application

Phase 1Gain Management Support forSourcingInitiatives

Phase 2Organize and Profile theSourcing Group

Phase 3Study,AnalyzeAndRecommendSolutions

Phase 4NegotiateAgreementsand DevelopImplementation Plan

Phase 5Establish And ImplementAgreements

Phase 6Sustain Strategy & DevelopRelationships

l l Negotiation Preparation

Some of the ToolsStakeholder Position Map

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Status Report Template

Porter’s Five Forces Framework

Negotiation Objectives

MDO LAA BATNA

Developing Supplier Messages Checklist

Cost Reduction Potential

$ spend # of suppliers

Cost reduction

%

Negotiation Preparation Checklist

Risk / Value Matrix

RIS

K

VALUE

Knowledge Transfer (Process, Category) is Enhanced by Using “Advisors,” not “Consultants”

• Some consulting firms use the so-called “School Bus Strategy” –hiring personnel right out of school who learn on the job at the g p g jclient’s expense. This typically leaves little process or category knowledge behind.

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• Experienced “Sourcing Advisors” coach and teach teams, speeding up the learning process and making “knowledge transfer” (and sustainable results) a reality.

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Strategic Sourcing is a Core Business Process, and is One Important Element of a Transformation Plan

Strategic Sourcing is a disciplined, multi-stage process, typically involving cross-functional teams examining the Total Cost of Ownership

Key success factors include:• Follow a true strategic sourcing process• Active support from the Executive team • Speak with One Voice to suppliers / act like one organization• Shut-out attempts by suppliers to “back-door sell”p y pp• Share objectives across the entire organization• Permit no opting out – maximize leverage by bundling all

internal requirements before going to market• Allow no sacred cows – take a fresh look at everything

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Making Sound Business Decisions Requires a Focus on Total Cost of Ownership (TCO) – Not Merely Price

Purchase Price

Performance Problems

Customer Dissatisfaction

DisposalEquipment Service Calls

Total Cost Focus

Legal

Logistics

Late Delivery

Maintenance

Repair/ReworkHigh Inventory

q p

Administration (Transaction)

s TCOTraining

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Best Practices Regarding Procurement and Transportation Organization Design

Recognize the difference between strategic activities, and tactical/transactional activities

Strategic

Perform the strategic at an “enterprise” level on behalf of all businesses. Perform the tactical and implementation as close to the operations/sites as possible.

Enterprise strategic proc.and transp. activities

Strategic

Tactical

Division tactical activities; Implementation & change mgmt

Rationale: This combines the best of both worlds. It ensures leveraging of total corporate spending (to maximize synergies), while understanding the needs of the internal customers.

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Centralized Hybrid (Center-led) Decentralized

Organizational Design Options for Procurement and Transportation are Fundamental

• Strong, unified professional organization

• Solid line reporting to head of the function

• Accountable to whole organization and to each business unit

• Small central staff develops policy, training, coordination needs

• Strategic personnel serve entire organization

• Dual reporting of local personnel to local management and to corporate head of the function

• Separate procurement & transportation organizations

• Dotted line reporting to corporate head of function, if there is one.

• Some degree of informal coordination and collaboration

F t• Can provide opportunity to build

synergies across company while sensitive to each business unit

• Politics can be brutal • Critical success factors: strong

leadership, alignment ofobjectives, other transf. elements

• Difficult to implement Best Practices• Less scale and leverage, weaker results ($, supplier performance)• More personnel required to accomplish objectives

• Rapid adoption of Best Practices, such as e-Sourcing

• Best for scale, leverage and results

• Usually only possible with strong, highly respected CEO

Features

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The Role of Procurement

High degree of business unit / user involvement

• Media / advertising• Consultants• Outside legal services

The Role of Procurement can vary –but, Procurement should be involved in all areas of spend

/ • Outside legal servicessupport

Low degree of business unit / user involvement

• Utilities• Distribution, logistics• Contract Manufact.uring

• Office supplies• IT Standard Equipment• Lab Supplies

Support: Manage/own:

facilitate

manage / ownSupport:play a support role, provide sourcing process expertise to user groups who provide subject matter expertise and mainly own the decision-making authority

Manage/own:direct the entire sourcing process on behalf of users (some user input may be required relative to setting specification and gathering basic business requirements). Decision making delegated to category sourcing team

Facilitate:sourcing organization facilitates input across multiple user groups; leads sourcing process, shares the decision-making responsibility regarding sourcing strategy/supplier selection

Executive

RolesEstablish expectations and policyCreate environment that encourages cooperationM it ll f

Overview of Transformation Governance

Transformation Leadership & Program Mgmt.

Steering Comm. Monitor overall performanceDeal with unresolved obstaclesAcknowledge successes

Provide overall guidance and support, including transformation leadership, training, best practices, benchmarks and sourcing strategy assistanceMonitor timelines, and maintain overall scorecard for Steering

Sourcing Teams

Follow the sourcing processCommunicate (internal & external)Craft One Voice messagesAccountable for achieving targetsPlan & execute implementationSourcing

Teams

Sourcing Teams

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Negotiations Management Should Not Be Left to Chance – It, too, Deserves Best Practices

“Old” Style “New” ParadigmMulti disciplinary team

Speaking With One VoiceLone ranger, hard bargainer

g

Get a good deal Targets based on research to determine:• Most Desired Outcome (MDO)• Least Acceptable Alternative (LAA)• Best Alternative (BATNA)

Supplier knows the market Using market intelligence to build a facts base

One round Multiple negotiating rounds until predetermined objectives are reached

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Off the cuff Extensive scripting and role playingMeetings happen Preplanned agenda, preplanned communication

One step process A multi level approach with face to face negotiation as only part of the process

Speaking with One Voice – a Powerful Discipline

Create Awareness: Every conversation with a supplier, no matter how innocent or “technical” it might appear, is part of the negotiation processg pTake Action:• All meetings/conversations are planned, with objectives and a script

• All likely contact points within your company are identified, and are brought into the process

• Everyone within your organization practices the discipline of “speaking with one voice” to suppliers

Making this happen requires constant communication and reinforcement. Illustration: http://www.greybeardadvisors.com/resources/dvds/

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A Final Comment About Transformation

Key CPO priorities in 2012:Managing supply chain riskVisibility into all external spendS d d tSpend under managementAdopting and embedded a robust strategic sourcing processTalent management and skills development (e.g. “negotiations management” as a best practice)Revenue growth through supplier collaborationReducing supply chain complexitySupplier relationship management

The greatest risk is approaching these initiatives as individualThe greatest risk is approaching these initiatives as individual projects

The best way to achieve – and sustain – these and other initiatives is by making them part of a comprehensive transformation plan

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Outline


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Audience Poll

• In our organization, top management has already made a strategic commitment to transforming supply management. They have:

• Explicitly acknowledged the strategic role we will have in our companyExplicitly acknowledged the strategic role we will have in our company• Increased our annual budget significantly, to support the transformation• Allowed us to hire more strategic talent• Allowed us to invest in meaningful amounts of training• Given us “high-potentials” from other departments as cross-functional talent

within supply management• Given us a “seat at the table” with the executive team

– Strongly Agree (5)Strongly Agree (5)– Agree (4)– Neither Agree nor Disagree (3)– Disagree (2)– Strongly Disagree (1)

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It takes Homework, Benchmarks and Good Leadership to Develop and

Present Credible Transformation Options

ear-e

nd)

Fast Transformation

$ Y M

$ X MCos

t Red

uctio

ns (a

t ye

Moderate

Slow

$ Z M

40Years

1 2 3 4

$ 0 M

$ X M

Annu

aliz

ed

As - Is

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You Can’t Expect Executive Support Without a Credible Business Case (high-level example)

Option Cumul. est. results ($

Cumul. est. total

Cumul. incremental

Cumul. external

Est. travel and related

Cumul. est. cost ofresults ($

Mil) in excess of the “As-is”

total investments /costs (sum of columns to the right)

incremental internal resources / full-time FTEs

external resources for transf. guidance and process/ commodity expertise

and related expenses

cost of eTools

Slow $ x $ a $ a $ a $ a $ a

Moderate $ y $ b $ b $ b $ b $ b

Fast $ z $ c $ c $ c $ c $ c

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The $ ReturnThe $ Investment

Components of the $ Investment

Final Point: Get Senior Management’s Attention and Support

• Speak their languageDevelop a vision with bold objectives that directly relate to senior• Develop a vision with bold objectives that directly relate to senior management’s interests (EPS, ROIC, cash flow, risk management, etc.)

• Lay out your transformation plan and roadmap• View technology as an enabler of your transformation plan and stretch

objectives• Build your business case (what you expect to deliver - in exchange for

resources and budget, speaking with one voice discipline)• Be willing to make a commitment in order to gain top management’s g g p g

commitment • Lead and Make It Happen!

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Business SituationHistorically decentralized, with many autonomous businesses, this growing company was in the process of organizing itself to achieve synergies across the businesses – including in the procurement and supply chain management arena. The company issued a Request for Proposal (RFP) to 15 consulting firms. Greybeard Advisors was one of eight to respond with a detailed proposal, and was selected f th t ft th h l ti

Greybeard’s Transformation ExperienceLarge Metals Company case study

for the engagement after a thorough evaluation process.

Greybeard Advisors Role Results & Benefits Interviewed procurement, transportation and supply chain staff. Interviewed internal stakeholders and clients.Analyzed external spend, current contracts, and addressable spend (indirect, direct, and logistics)Analyzed procurement strategies, processes and practicesPrepared an assessment of the current state, and an assessment of cost reduction opportunities by major spend category

The interview and assessment process established credibility for the effort, its findings and recommendationsEstablished credibility for the transformation roadmap, and the strategic sourcing and negotiations processes as a new, core business process for this companyCreated an awareness of procurement and supply chain management as a strategic driver of improved business performance across all areas of spend, and across all b i

g yPresented findings, recommendations, and business case to the executive team, and to the larger transition leadership teamDesigned a detailed roadmap to guide the client’s transformation to world-class practices and resultsProvided training & transformation guidance and support, including sourcing process and spend category experts.

businessesGenerated a successful transformation launch, with large financial benefits seen within the first 6 months.Greybeard Advisors continues to provide as-needed, focused support to this client as its transformation continues in both indirect and direct materialsThe client’s success story has been profiled in a major magazine

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Outline

What really is “transformation?”Linking supply management transformation to top management’s interests and objectives The opportunities possible with world-class supply management & how to create awareness and excitement among your top managementKey elements of a successful transformation roadmap Final thoughts on getting senior management’s attention Leadership success factors

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Three elements of every organization that occur “naturally:”

One Aspect of the “Science” of Change Management

Therefore. . .

ConfusionFrictionMalfunction

Everything else that happens must be putin place by design

Peter Drucker

The Leadership Challenge and Roadmap

1. Challenge the process a. Search for opportunitiesb. Experiment and take risksb pe e t a d ta e s s

2. Inspire a Shared Visiona. Envision the futureb. Enlist others

3. Enable Others to Acta. Foster collaborationb. Strengthen others

4. Model the Wayya. Set the exampleb. Plan small wins

5. Encourage the Hearta. Recognize contributionsb. Celebrate accomplishments

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Management Leadership

Management is about coping with complexity;Leadership is about change

• Control complexity

• Develop plans

• Allocate resources

• Organize and staff

• Prevent negative outcomes

• Create change

• Set direction

• Create strategy

• Align people

• Promote positive outcomes

• Control People and processes

• Empower people and processes

Key TakeawaysAbout Achieving the Next level

Becoming “World Class” in supply management is much more than mastering one business process (e.g. strategic sourcing), or implementing the latest technology tools.

Companies that have created sustainable transformation results have focused on many initiatives – spanning 6 key dimensions.

Transformation is a journey. The length of the journey can be shortened by developing a roadmap for change that is based on the learnings of other companies that have succeeded (or failed) on this journey.

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Success requires both Art and Science!

“When the rate of change inside an organization is less than the rate of change outside, the end is in sight.”

Jack Welch, former CEO, GE

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Questions?

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Relevant Reading

“Straight to the Bottom Line®”

“Next Level Supply Management Excellence” (the sequel to Straight to the Bottom Line®)

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Contact Information

Email: [email protected]

Phone: 412-874-8410 (USA)

Visit our website: www.GreybeardAdvisors.com

Visit Bob Rudzki’s blog on Supply Chain Management Review’s b itwebsite: www.scmr.com

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