Supply Management: Supply Managers Into New Shoes

Supply managers, formerly known as procurement chiefs, are the
new managers to watch. Until recently, they spent much of their time-and their
careers-tied to warehouse, and their primary concern was to reduce costs. Then
companies in a range of industries started waking up to the fact that supply
managers were well-positioned to play a more strategic role, to help drive
innovation and to think outside the traditional four walls of the warehouse.
Instead of sticking to their original function-purchasing what the company
needed at the lowest cost-supply management leaders now enable their companies
to become more agile competitors. As a result, they're finding themselves on
the fast track to the executive suite.

Today, not only do companies expect supply management to save
money-our experience finds most companies can save an average 8-12% in overall
procurement costs, and in categories such as hotels and telecom up to 40%-but
they also expect supply managers to deliver shorter cycle times, help with
product innovation, enhance the quality of products or business outcomes and
even play a part in revenue generation. Whereas, in the past, they purchased
pencils, now they are instrumental in securing a range of services, including
outsourced business processes and information technology.

In a recent Bain&Company survey of 156 supply experts
conducted, more than 90% said they had been tasked with new and broader
responsibilities in the last three years. It's not too hard to see why: In an
era of geo-political risks of supply-chain disruption, increasingly constrained
natural resources, and the exploding importance of information technology and
global services, supply management has become mission critical. Even as little
as five years ago, such a possibility seemed remote. In 2001, for instance,
Sloan Management Review published an article titled Strategic Purchasing Remains
an Oxymoron.

But, all that is changing. Today, supply managers are expanding
their influence within their organizations, and the ones who deliver results are
also moving up in status. An institute for supply management survey shows that
more than a third of Fortune 1000 companies have recently placed manufacturing,
which is a key training ground for CEOs, under supply-management executives.
Previously, corporate leaders rose from marketing, finance and production. Now
they're being bred in supply management.

Consider Chrysler's President, Tom Stallkamp, who used
supply-management savvy to transform the car maker's cost position into an
asset that proved irresistible to acquirer Daimler-Benz. Stallkamp, who went
from being a Ford buyer to vice chairman of DaimlerChrysler, later went on to
become CEO and chairman of MSX International.

Likewise, when the former chief procurement officer (CPO) at
Waste Management, Bradley J. Holcomb, was hired as senior vice president of
Global Materials and Supply by Royal Group Technologies, his mandate became not
just to reduce procurement costs, but also to lead key businesses-deciding
whether they are a core capability and competitive enough. As a result of
Holcomb's analysis, Royal has divested several businesses. Holcomb also leads
Royal's China strategy, where his experience in outsourcing and global supply
is vital.

Rule 2 Think
of ways to source innovation: You're not dealing with
commodities where there is little innovation, but with functions and
processes that have significant impact on the business. In the case of
customer call centers, the new innovation could be a process that gets the
customer's problem solved as quickly as possible and then helps the
agents just as speedily turn their attention to upselling. Partner with
third parties that can bring innovation to the process as well as to
service-level agreements. That could mean technology that helps call
center agents better understand who's calling and what their needs are,
and then expediting those calls through sophisticated routing techniques.

Rule 3 Always
provide incentives for suppliers: In the early days of
outsourcing, companies fixed a price over five, seven, even 10 years. Now,
as service deals get more sophisticated, there's a need for more
complicated arrangements that include incentives for vendors. For example,
give the vendor a reason to build new technology that will improve the
process. Also, write business-process outsourcing arrangements that have
built-in performance payments indexed to customer satisfaction, stock
price or cost reductions. Put more and more of their compensation at risk.
Recognize that aligning incentives is critical. You want to create a
scenario where you and your provider win together or lose together. Give
the partner an incentive based on hit rate of upsell and cross-sell. The
ultimate is that they take no fee but instead are compensated in stock
(but very few vendors are willing to do that).

Rule 4 Include
refresh schedules: For long-term contracts, specify that the
vendor has to refresh the technology at a specified rate, but that you
share in any benefits. Say you're currently doing $10,000 a day in
cross-sell out of your call center. If the vendor can take that to $15,000
a day, offer it 15% of that extra $5,000 on top of the fixed fee.

Rule 5 Seek
help from trusted advisors: Remember, you are still learning.
Recognize that the vendors have done hundreds of deals, and understand how
to maximize their objectives. Leverage experienced advisors and legal
professionals who have seen an equal number of these deals. The agreements
are quite complex, often involving more than 1,000 pages of contractual
language.

Rule 6 Build
in flexibility: We know of one company that, when it saw its IT
costs spiraling, decided to take costs down as quickly as possible. The
company signed a 7-year contract to outsource IT. But after two years, the
industry cycle turned and costs came down. Suddenly, the company's main
objective was to grow revenues.

Yet it had committed to five more
years on their IT contract. The deal didn't stand the test of time.
Deals have to have more flexibility built in. They have to be rigid enough
to hold both parties' feet to the fire, but flexible enough to change
with the times. Remember: It's an art, not a science.

Start by thinking through the
"what ifs." What happens, for instance, if the company becomes
half the size it is today? A telecom company signed an outsourcing deal,
much of which was at a fixed price, regardless of the amount of IT support
needed. At the time, the company had about $5 bn in revenues. The company
shrank to become a one-billion dollar company. The original contract did
not anticipate that the company, now one-fifth its size, must pay the
IT-services costs for a five-billion dollar company.

Rule 7 Recognize
that these are more like strategic partner relationships than arms'
length vendor relationships: That
means you should pick partners that are culturally compatible and that
view your relationship as something to be maintained over the long haul.

Rule 8 It
takes time to structure these deals: Effective procurement
process can take 6-12 months, not 6-12 weeks, and every step must be
carefully managed. It's not uncommon to take more than a year to work
through these contracts.

Rule9 Anchor
the deals in your company's strategic business context:
Basically, if you're buying pencils you don't have to think very hard
about how this fits with strategy. Increasingly, outsourced services are
moving from the periphery to the core. That means you need to make sure
the vendor, services and deals themselves are tied to and supportive of
your company's fundamental business strategy. You can't cut costs if
your objective is to grow revenues. You might undermine the strategy. And,
not only does it need to be anchored in strategy when you do the deal, but
it also needs to be flexible to address changes in strategy.

Rule 10 Remember
the retained organization: When outsourcing your IT function,
it's not as if you're washing your hands of it. You have to keep an
inside organization of about 10—15% of the original size to act as a
liaison. Sizing, designing and implementing that organization for
effectiveness is critical.

As companies learn the complex art of sourcing services, their
supply managers are discovering that there's a world of difference between
purchasing pencils and business processes. For example, structuring a multiyear,
multilevel contract for call centers or IT services requires understanding how
to use the deal as a hidden accelerator of the company's strategic goals.

Success can mean delivering increased incremental revenue,
reduced cycle times and innovative ways to sell products. Failure means getting
trapped in costly, inflexible contracts that reduce profitability and growth.

The Bain survey found that 34 of the 156 companies or 22% are
attaining growth of more than 20% a year, and a key driver of that success is
superior supply-management capabilities.

Our experience has taught us that when supply managers make the
leap from pencils to processes, they sometimes get blindsided. They don't
realize they're in over their head until it's too late. That is a very
different animal from what they're accustomed to sourcing, and new rules are
in place to ensure that these complex sourcing deals serve as an accelerator of
strategic goals, not as costly partnerships that reduce profitability and
growth.

Recognize that these deals are strategic and have the potential
to create or destroy value in amounts well beyond the contract value. If you don't
have clarity of objectives, it's hard to structure a deal. Even if you have
clarity but pick the wrong partner-one that's not culturally compatible or
lacks the staying power - you could destroy value. Or if you have all those
elements in place and you do the wrong deal, you could destroy value.

Klaus Neuhaus
and Rudy Puryear

vadmail@cybermedia.co.in