Demanding better supply management

In 2004, just days after Greece pulled off its surprise victory in football's European Championship, Adidas delivered more than 145,000 blue-and-white Greece team jerseys to stores across Europe.

Smart marketing? Without a doubt.
But perhaps even more impressive was the feat of global procurement. Tapping into a centralized supply chain that coordinated orders and deliveries for each of its country-based sales subsidiaries, Adidas created just-in-time products for the championship team, with duplicate sales triumphs in every other winning country as their national teams advanced through the series. To round out the success, Adidas's flexible supply chain strategy delivered these sales at very low risk, avoiding over-investments in materials or finished products.

What a change from the often drab world of procurement. A company's "purchasing" organisations once had a simple enough task: buy what the company needed while spending as little money as possible. Today the function is typically called supply management, and it faces a far more complex set of challenges. Corporate leaders expect supply managers to ensure an uninterrupted flow of goods and services, often on a just-in-time basis, no matter where in this uncertain world the purchases might be originating. They expect supply managers to help improve product quality, reduce cycle time or time-to-market and increase the rate of innovation. Of course, they also still expect that supply management will deliver the lowest possible total cost - for an ever-larger range of corporate expenses.

Demanding objectives
Perhaps the real surprise is that some companies' supply-management teams actually manage to achieve these demanding objectives. In a survey of procurement practices at 156 large companies, Bain & Company found that 34 organisations, or 22 per cent, stood significantly above the rest. These leaders have growth rates of more than 20 per cent a year - itself no small matter - and their supply-management organisations seem to be in hyperdrive. Supply managers at these companies generate significantly more incremental revenue than their counterparts at lower-performing companies. They achieve greater reductions in cycle times. And they are far more likely to bring innovation to the company, either on their own or through suppliers.

A handful of companies have reinvented supply management along these lines. Not surprising, the leaders look and act quite different from their more conventional counterparts. For one thing, they pursue procurement's traditional goal of cost reduction in a variety of innovative ways. Rather than simply offering higher-volume, lower-price contracts to a select group of suppliers, for instance, these companies also foster new competition by continually searching for new suppliers and developing alternatives, including insourcing. They also perform independent analyses of the market and of suppliers' cost structures and returns, simulating the impact that greater purchasing volume can have on per-unit costs. Both these measures help supply management organisations transform negotiations by establishing analytically sound target prices in advance.

In addition, leading supply-management organisations project (and demand) continuing cost reductions year after year. Analysis shows that cost per unit in most industries declines between 20 per cent and 25 per cent for every doubling of accumulated experience, which charts as a downward-sloping curve. The procurement leaders expect that some of those savings will flow through to them, year in and year out.

Consider the example of Bayer, which set up strategic-sourcing teams to coordinate its purchases. For key commodities such as chemicals, it has moved increasingly toward a single primary supplier, with the aim of achieving "producer economics", or better-than-market price, wherever possible. Its chief buyers have become, as one of them put it, "students of the [relevant] industry". Bayer also began careful evaluation of its suppliers, with a goal of obtaining regular improvements in price and performance. Over a two-year period, cost-reduction initiatives at the company's NAFTA region saved more than $125 million, equal to 8.3 per cent of its total spend on chemicals.

Beyond price
But world-class supply-management organisations do not make decisions on the basis of price alone. Depending on their company's strategy and the materials sourced, they may put a premium on speed, quality, flexibility or assured supply. Naturally, getting the picture right requires charting costs and delivery times for single parts, subassemblies and major assemblies. It also requires accurate projections of warehouse time, inventory build-up and potential lost sales and stock-outs because of supply disruption or failure.

But again, leaders don't stop with these basics. They model supplier-industry dynamics in critical categories, along with the position of the various suppliers within the industry. They ask themselves questions such as: What is the macroeconomic view of supply vs. demand in the industry? Is supply consolidating? Expanding? Which suppliers are financially strong enough to make it through the next downturn? Which are the most innovative? Their objective, typically, is not necessarily to bet on the supplier with the lowest price but on the supplier that is likely to be the strongest horse in the race.

Finally, world-class supply-management organisations make a point of viewing procurement as a source of innovation. They take a variety of approaches to this goal. One approach, for instance, is to design products to cost. In some industries, as much as 80 per cent of the total cost of a product is determined during the design phase. Bayer actively invites suppliers to propose cost-reduction ideas for some of its chemical recipes. A Swiss precision manufacturer gets a cross-functional team involved in new-product design at an early stage, researching what features and capabilities customers really want and what they are willing to pay. It then involves suppliers early on so that it can draw on their specialized production knowledge during development and prototyping.

Another approach is to tap supplier knowledge for new and improved products. Procter & Gamble, for example, relied on the chemical expertise of BASF to help develop the melamine foam that is the active ingredient in the company's Mr. Clean Magic Eraser; its Mr. Clean AutoDry Carwash detergent utilizes a polymer developed by Rhodia. "We have an R&D strategy that combines internal core competencies with external capabilities," P&G's vice president for R&D told a reporter. That, he added, has been a critical factor in doubling the future value of P&G's innovation pipeline. Similarly, a major company in a high-technology industry, though No. 2 in the market, has stayed right on the heels of the market leader by tapping the expertise of equipment suppliers.

A third approach is to expand the supplier universe in search of innovation. Raytheon's Integrated Defence Systems unit, for instance, hosted a gathering of nearly 100 local companies in 2005; it was looking for innovative ideas in fuel cells, optics, software development and radiation-resistant electronics. "We're trying to fill [our] gaps with better and additional capability," said the unit's manager of strategic development.

Different - and better
In all these ways, world-class supply-management organisations act differently from their lower-performing counterparts. They look different as well in the way they are structured and in their relationship to the rest of the company. For example, supply management at these companies is no longer the discrete function that it once was; it is more like a continuous, companywide exercise. Supply managers participate in, and often lead, cross-functional teams, typically consisting of representatives from marketing, R&D, finance and other departments. Often, cross-functionality doesn't stop at a company's walls: the teams may even include supplier representatives. Whatever the structure, the teams establish group metrics and incentives, so that they measure and reward what matters to the business as a whole rather than what might matter to each individual function.

Thanks to such cooperation, "procurement smarts" begin to permeate the company. At American Express, for example, many units hire outside IT staff; and in the past they were pretty much on their own when they did so. Today the company's supply-management organisation has standardized and rationalized the hiring of IT staffing services, narrowing the supplier base from roughly 180 to just 20 primary suppliers and 20 niche suppliers. Steven Squadere, vice president of strategic sourcing, says that the consolidation has contributed to improved quality as well as cost savings: "It's much easier to track the performance of 20 suppliers as opposed to 180 suppliers."
There is a visible change in the management of supply-management organisations as well. Put bluntly, the function is no longer a repository for "time servers" and others on the slow track. BP, for instance, has mounted a thoroughgoing recruitment-and-coaching program designed to increase the skills and knowledge of people in procurement. Then, too, more and more fast-rising corporate leaders are coming out of supply management. Shelley Stewart, who oversees procurement at Tyco International, has recently become chief procurement officer and senior vice president of operational excellence, leading Tyco's Six Sigma/lean manufacturing, working capital, real estate and strategic sourcing initiatives. Volvo recently promoted purchasing chief Steven Armstrong to the new position of COO in charge of the daily operations of Volvo's R&D, manufacturing, purchasing and quality departments. Many more procurement leaders at high-performing companies are likely to find similar opportunities. When asked in our survey whether "a procurement career path is laid out and seen as a qualification for other key roles in the company," supply management leaders said they "agreed" or "strongly agreed" by a 38 per cent margin compared with respondents from average companies.

As recently as five years ago, the idea of strategic purchasing was regarded by many as an oxymoron, unsupported by real-world data. But the world of supply management has changed dramatically. Today, supply management at many companies is a complex function that is critical to business success, with responsibility for total costs, quality, delivery and innovation throughout a company's entire supply chain. A sign of the times: the strategic contribution of supply management is measured not only in terms of cost savings, the traditional metric, but also increased shareholder value.