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Purchasing Transformation moves!
July 7, 2011Cheese to Change
July 9, 2008
Lately we published the book Purchasing Transformation, which covers the necessary changes for a purchasing department to cope with the actual challenges of the global economy. When it comes to implement changes within an organization, one of the main drivers are still the people, who are supposed to adopt. According to the Handelsblatt businesss monitor, Europe’s top managers are displeased with their organizations when it comes to the ability to change. (The other main showstoppers are the qualification of the executives as well as the lack of customer focus).
In my opinion, the reason for that is that most executives are not focused on the human factor, when it comes to conduct changes in a big organization. First of all, they have already done the change process themselves: they understand already, that a change is necessary and they know, what they want to change and how they want to achieve it. They forget very often to communicate these findings to their employees. What does the market look like, what do we want to achieve with the new strategy, how do do we want to achieve it?
Besides communication, you have to understand, what is happening to people, when there is change going on. A good model was developed by the psychologist Cynthia Scott. People confronted with change go through four phases: ignorance, resistance, explanation and finally acceptance. The speed at which these phases are completed varies substantially from person to person. It is important that each of these four phases should be accepted and that active support should be provided.
Some very good inspirations about change can be found in the book “Who moved my Cheese” by Spencer Johnson. In the style of a parable, it describes how to anticipate, monitor and adapt to change. Actually, I would give that book to every new employee in my company. As soon, as you have the right attitude in a organization, enjoying change becomes a part of the culture.
CHAT … and boost your productivity by 60%
July 4, 2008
I always knew it: having some short chats increases the productivity during work time. But only, when it is done between two tasks, not during a task. That was the finding of a study done at MIT, which was reviewed by John Whitfield in the magazine Nature (click here to read the full story)
Especially people that have to work in a team (like purchasers) increase their output by having short discussions. In the MIT study the most connected person got 60% more done than the least connected. For the researchers this was a complete surprise. They guessed that the direct reporting lines and the interactions with the managers would have influence, but as a matter of fact the informal network was the real efficiency driver. (Probably the “Fika” – a kind of a coffee-tea-break at 3 p.m. – is the secret to success of the Swedish economy.)
Another finding was, and that is obvious, that productivity melts down, when somebody wants to chat with you during a task. The most productive workers were the people with the most consistent behaviour.
European Top Managers Refocus on Expense Reduction
July 2, 2008
According to Germany’s leading business newspaper “Handelsblatt” European top managers shift their attention more towards the reduction of expenses again. In the Handelsblatt Business Monitor, 1170 European Top Managers answer, on a regular basis, questions regarding future strategies.
This result is a major turnaround. Only one year ago the strategic focus on the acceleration of growth had a share of 49%, this time only 36%. The focus on the reduction of expenses increased to 31% (last year 25%). A balanced importance for both areas see one third of the participants.
The reasons for the increasing cost focus are obvious: the high prices for raw material (especially steel and oil), increasing costs for energy and logistics, the enduring weakness of the dollar and the associated decreasing market growth in general. The question is: how will the corporations achieve the savings targets?
Of course, we will see again some restructuring projects, which will lead to mass layoffs (Siemens, RWE, Volvo already started). But: according to Handelsblatt, this time the main focus will be on the improvement of global raw material purchasing, replacement of actual used raw materials as well as re-design of the supply and value chain. This sounds like there are some promising opportunities at the horizon, to prove the value of the purchasing function …
In the Handelsblatt Business Monitor 401 Top Managers from Germany, 250 from the U.K., 207 from France, 153 from Italy, 103 from Switzerland and 56 from Austria are included.
Microsoft XP vs. VISTA: Negotiate it!
July 1, 2008
Markets react really strange sometimes: although the new Microsoft operating system Windows Vista is supposed to deliver higher security, better performance and a smarter architecture, people still want to buy the forerunner version Windows XP. As it does not fit, the official Microsoft strategy to sell XP anymore, there are strange reactions going on: the main distributors like Dell or HP officially sell VISTA computers. But: to fulfill the demands of the market, they “pre-downgrade” the VISTA computers to XP computers (click here to read an article about it on heise online).
Of course, that does not really help Microsoft to get the optimum spread for their new operating system. Major marketing campaigns failed to convince people that VISTA really is the better choice. Even big corporations like Daimler or Intel prefer to “downgrade” to XP.
How could you exploit that situation as a purchaser? Every Microsoft salesman has the “deployment rate” in his KPIs, not only for the operating system but also for the other MS office products. When your internal IT wants to switch to VISTA use the given circumstances: get some additional discount or add on licenses, because you are helping to fulfill the deployment of Windows VISTA.
Peak Oil (Part IV) – The Legend of the Space Pens
June 27, 2008
Today hit the oil price 142 dollars and the stock exchanges react as predicted: they were going down. (It did not even help to stabilize the oil price, that 30.000 brand-new Volkswagen were destroyed by a hail storm) . The background stories, on how companies are going to react, are however missing.
More Companies localize their production
Vertically integrated production called it underwear producer American Apparel. Already in May Jason Bush was blogging about the localization of Wal-Mart. One of the main aspects in this post was that this is good marketing. As a marketing person I agree, it is, indeed. And I think that this will also pay off on the long term by reducing costs. It is pretty obvious, what possibilities purchasing functions have short- and mid-term, to react on the given challenges:
- - Shorten Supply Chains
- - Localize Production
- - Localize Supplier Base
- - Review “oil contribution” to the main products
Central purchasing will become hard, central led the standard, especially with qualified local purchasers. I dare to predict, that Franchise concepts will be on the rise. Delivery and production standards are defined centrally; as well as the specifications from purchasing, production will be done locally. (Of course it will help if you have a sophisticated e-Sourcing solution in place, to guarantee still global standards on quality)
Personally, I am more afraid of small products, which will have major impact and which are hard to foresee, similar as the donkey story in the very beginning of this series. An open ear for supplier innovations will be in the next years a deciding factor to succeed. Perhaps the style of Germany’s leading retail discounter Aldi could be there a role model: rumor has it, that every interested supplier has just to drive to the headquarter and he will get, without arranging an appointment, at least 5 minutes with a purchaser to present his product.
An Urban Legend
Originally I wanted to end with another story: End of the 60ies, during the race to the moon, the Americans realized, that their pens do not work in outer space because of the missing gravity. They invested 11 million Dollar to invent the so called space pen, which works under water, in the vacuum and in zero-gravity. And what did the Russians do? They took pencils. Unfortunately this is an urban legend. (Read the real story here) But the true story gives me even more hope to cope with peak oil. Ordinary capitalism found the right answer to the zero-gravity problem. Paul Fisher succeeded with his company to develop the right writing instrument, and as a true capitalist he sold them to both: Russians and Americans. Anyway: The right mixture of capitalism, inventive talent, reasonable politics and smart purchasers will hopefully lead to a good answer to the peak oil problem.
Peak Oil (Part III) – No More Miles & More for Shrimps and Airbags
June 26, 2008
During the last decade shareholder value was the big driver for big companies. With the oil price peak I expect that purchasing will face the next big challenge … perhaps the biggest challenge ever. Especially big companies, who are not too good in reacting fast on the changing environment, will have big problems. It is a little bit like the evolution and the dinosaurs.
I remember a speech eight years ago from Heinz Traudt, the former Director International Purchasing of BMW. It was about the e-procurement project of BMW and he also explained the value chain of airbags. Until the airbag was mounted into a car in Munich or in the US, the drapery was produced in Africa, then it was delivered to South America to be sewed and after that the bags were at last mounted in Germany or in the U.S. The airbags were traveling approximately 10.000 miles, until finally assembled into a brand new BMW.
There are thousands stories like this. For instance about our delicious shrimps: They are trawled in the Northern Sea. Then they are shipped to Tunisia for peeling. After that, they return to the Northern Sea to the Northern European harbors. After a short stop for packaging in another factory the shrimps are finally distributed to the super markets. This means an additional 4.000 kilometer journey for the crustaceans, instead of 10 to 700 kilometers. I guess that we can celebrate a big misgiving, when we tell these stories someday our grandchildren (perhaps we should make a pact to never tell them).
When it comes to logistics, we were not too innovative lately. 95 % of global logistics is based on petrol. There are concepts rising like the company Skysails, who tools up vessels with large towing kites. Perhaps there will arise also the cargolifter concept again. Cargolifter was offering logistic services with zeppelins.
What about power supply?
The energy sector does not look as bad as the logistics. At least on the first view. Depending on the countries between 30 to 60 % is depending on oil. But when you have a closer look on the sources: most of it is based on gas, uranium and coal. These resources are as finite as oil. In Europe the spend of renewable energy is currently on a level of 6.5 %. The role model countries for using renewable energy are Austria and Sweden. Austria copes with more than 20% of its demand by renewable energy sources. The problem is the scalability. Although the big countries like France or Germany are taking some effort to become less dependent on fossils, they are stuck on a level between 5 to 10%. The good news is: innovation is going on in this sector, using wind, wood, bio resources, etc. The question is: is it enough to feed the enormous appetite for power of our societies? Another problem arising is that we risk famines, as too big agricultural crop lands are used for biodiesel production.
Purchasing can drive change
To talk about abstinence was in the past not too popular. But we have to think about our behaviors and as you can see already now, the high gasoline price makes at least private consumers think. Purchasing is in charge to drive the change in companies. Companies, focusing on smart purchasing and supply chain strategies will be prepared for the changes created by peak oil. They will adjust and fit faster to the new environment. Darwin was once getting his inspiration from an economist to come up with his evolution theory and now evolution comes back to economy. Once more: the fittest will survive.
Today another discussion about oil exploration was in the media. The conservative U.S. candidate McCain wants to get hands on potential oil resources nearby Alaska.
Tomorrow I will come up in the last part of peak oil, how some companies are preparing already for the further rise of oil prices.
Peak Oil (Part II) – the big global Angst
June 25, 2008
What is peak (of) oil? According to Wikipedia, Peak oil is the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters terminal decline. Currently the global daily output is at 87 million barrels. According to Christophe de Margerie, the managing director of Total, we will reach peak oil at 100 million barrels per day at 2020. Of course there are even more pessimistic, but also more optimistic, estimations on the market. The big news is that this is the very first time an official representative of a petrol company admitts, that we could reach that point in a near future.
Olivier Appert from the French institute IFP, predicts already for this year huge problems fulfilling the demands. According to the German magazine “DER SPIEGEL“, Mr. Appert sees even the danger, that we reach an oil price level of 200 to 300 Dollar until 2015. Of course, all stake holders should be interested in avoiding this high level, as this would affect the global economy very hard.
The Statistical Review of World Energy 2008 which was published by BP is only mediocore optimistic. The oil production decreased by 0,2%, the global demand was increased by 1,1%. The picture could be even worse, when the Europeans would not reduce their need for energy. Germany’s proportion of the Global oil consumption is 2,8%, whereas Northern America needs 28,7%. The US and Canada have together 4 times higher population, which would justify an oil consumption of 10%. It was no big surprise, that Mr. Bush was not too eager to sign the Kyoto protocol.
According to the BP study, the given oil resources will last another 41 years. The question is now, why BP changed the name from British Petroleum to Beyond Petroleum?
As Per Svanberg stated already earlier in this BLOG: oil fields, which were not profitable in the past, become more interesting to exploit in the future. At the moment there is a race going on for new oil resources. Denmark, Russia, Canada and the US are competing about the rights to exploit oil in the North pole region. A Russian submarine has even placed a Russian flag under the solid ice. It is pure irony that the global warming and the melting ice, makes it more interesting to exploit iron, manganese, uranium and … oil there.
Competition is not only rising in the Northern hemisphere: in the Pacific, the Japanese take intensive care for the corals surrounding the small Island Okinotori. The reason: without the corals they are running the danger, that the 7.8 square kilometer big island would be just swallowed by the ocean for good. As long as the island exists, Japan has the right according to international sea law to exploit all resources within a radius of 200 sea miles. Of course, the competing Chinese define Okinotori not as an island, but as a pile of rocks. Let us wait and see, if there will be oil findings around Okinotori and hope for the Japanese, that the corals prosper.
Tomorrow I will write about the alternative energy sources and about the influences on logistics and power supply.
Peak Oil Part I: Donkey Business
June 24, 2008
Latest victim of the oil price rollercoaster ride were the farmers of central Anatolia: the prices for donkeys increased within one year from 26 to 180 Euro, which implies a price advance of 558 %. According to the Turkish newspaper Zaman the amount of traded donkeys was doubled in the Yozgat region. In the village of Lök almost all farmers changed to donkeys as preferred transportation vehicle, because Diesel is not longer affordable for the locals.
The sudden increase of oil prices shocked the Chinese economy, American consumers are praying for lower gas prices and U.S. airlines expect losses of 10 billion Dollar.
When you have a look on the news from India, you get the feeling that we are just at the start of a much bigger problem: During autumn Tata motors launches the “Nano”, a full operational car sold for 1500 Euro (click here to see a earlier blog entry). This could become a similar success story as the Tin Lizzy, the legendary Ford success story of the last century. And this means that the daily need for oil will increase even more, as also the Chinese, the Indians, the Brasilians, the people of all the emerging economies have the same need for mobility as the Europeans, the Japanese or the Northern Americans.
The question is: are the current prices only a peak, caused by wild traders at the stock exchange? Are they the herald of a long term development? And what are the consequences for purchasing?
I will figure out in a small series on purchasing transformation, how the fear about peak oil influences the oil price, how this could influence power supply and logistics and what mid-term strategies purchasing departments could consider.
Marketing Spend – How to capture it!
June 23, 2008
Eight years ago I had an appointment with the purchasing director of one of Germany’s biggest breweries. When I offered him a solution to get more control over the marketing spending, he was waving aside. “These guys, they can just make what they want”, he explained to me, “they have the full backing of the management and the marketing spend has the status of a sacred cow.” When I was reading the last edition of the German business magazine “brand eins”, I was really happy. Henning von Vieregge, managing director of Germany’s communication agencies association (GWA), was complaining about the increasing influence of purchasing. Of course, I agree with some of his concerns. To purchase for a marketing function means also, that you have to understand how your marketing people are thinking.
First of all, a short look on the KPIs. Why do companies publish ads, place google advertising, go to conferences or build up huge displays at Piccadilly Circus? The currency of marketing is contacts: clicks on a homepage add, meetings at a fair booth or the amount of readers of a magazine. The KPI could be then cost per click, per contact, per view etc. As you can see, it is a myth, that marketing people do not care about the spend, the opposite is true: every marketing director is happy, when he could improve these values, since then he will have bigger effect using his budget.
How could you then improve the cooperation between marketing and purchasing?
The most common fault is, that the procurement professional becomes a part of the buying process at the very end. Usually he asks then for a discount, inexperienced suppliers are in shock, because they already gave their best price to the marketing director, experienced suppliers have a “purchaser’s top line” already in their calculation and give then a discount to the purchaser.
According to a study of the European Business School some marketing directors are afraid, that this “last stop” negotiation could damage also the relationship to their suppliers. As Christer Hallqvist stated in the book Purchasing Transformation: The best idea is, that purchasing steps in as early as possible. You can save the most money with the third party deliverables: printing, logistics, translations, desktop publishing, merchandising material … these are very often delivered by the advertising agencies and naturally the include for all of these services some margin. As soon as purchasing takes control, e.g. by establishing frame contracts for translations and logistic services, you can save a big amount of money. Taking over these services, should also not jeopardize the relationship to the agency.
When it comes to the creative services, my recommendation is: leave it to the marketing people. They create a briefing beforehand and make based on that a tender. A “bill of quantities” and clear deliverables do not exist in that stage, but should then be the outcome of the creative process … and this is, when purchasing comes in again.
The CIPS published together with the IPA and the ISBA a guide for marketing procurement called magic and logic. A nice analysis of this was done on the BLOG Sourcing Innovation.
