With many car manufacturers struggling with recalls and pointing the blame at their ailing supply chains this recent piece by Peter Hunter of HumanResourcesIQ (Root Cause of Toyota’s Failure: Employee Engagement) opened up the matter from a completely different perspective.  Hunter argues that engagement is the real differentiator between East and West Toyota production lines.

Is it possible that the faults that caused the recalls did not occur in vehicles produced in the East because they were spotted and rectified by an “engaged” workforce, while in the West the “disengaged” workforce knew of the problems but never reported them to Toyota because Western managers do not know how to engage their workforces.

I shared similar sentiments in a post relating to Bianchi bicycles a while back (One Supplier Audit Question You Probably Never Asked); “…In a world where cost and volume seem to be the rule of the day; passionate businesses can surely find a niche market and exploit it to the fullest, but it also means that the business must share the same passion as the consumers…”. Passion and engagement are related emotions. And both have been out of focus in sourcing recently.

Understanding why an end-customer buys the product should be essential for procurement.

If you’re solely focused on up-stream cost reduction, chances are that you are missing the real reasons why your product is unique and why customers are attracted. In many cases it’s more than just marketing gimmicks that have driven them to the stores. It’s the pride of owning something that they can identify themselves with.

I had the chance of meeting one of the marketing and sales executives of Scania last year, and during our discussion we touched upon the subject of events where she mentioned that Scania once had put a tattoo artist in their exhibition booth. And people were queuing to have the Scania logo permanently fixated on their skin.

With that amount of customer dedication to your brand, can procurement afford to chose suppliers who are not as – or more – engaged/passionate about their job.   I would say no.

Despite some of the headlines (true or not) regarding the practices of IBM’s executive management, there are still some interestion material emerging from the big blue.

In IBM Global Business Service’s recent ”Sourcing in a demanding economic environment” white paper the men in blue offer up a wide range of tactics and ideas for how purchasing departments can excel in even a harsh business climate. Though not much is new, and I personally would have emphasized exactly which skills are core when interacting with other parts of the business and taking on a leadership role in the value creation process, the authors have managed to collect a very comprehensive set of questions that purchasing managers should ask themselves when considering how to go forward with key purchasing challenges.

• Supply base: Who are the right suppliers?
• Commodities: What are the strengths and weaknesses in commodity coverage across growth countries?
• TCO: How can I help ensure sustainable TCO savings? How do I build a reliable business case and estimate risks?
• Quality and skills: How can I maintain quality levels? How do I attract and retain top-quality staff?
• Supply chain integration: How can I most effectively manage an extended supply chain? How can I help ensure competitive lead times and flexibility?
• Contracts and legal: What contractual and licensing issues should I be aware of? What are the import and export regulation requirements?
• Taxation: What are the benefits or pitfalls regarding local taxation? Should I buy in local or foreign currency?
• Language and local culture: How can I manage the local language and cultural challenges? How can I protect mu intellectual property and prevent fraud?

Though most of these questions may seem basic to more advanced purchasing professionals, I’d suggest you go through them in your next purchasing council (or board). Chance are that you will unveil unknown weaknesses in your supply chain that can be bettered.

One topic that kept popping up at the recent IBX Purchasing Executive Summit was the transition of goods to services and the implications this has on purchasing. Take cloud computing for instance; it’s the IT hype bar none of 2009, yet few purchasing functions have experience in sourcing the service let alone managing contracts.

Given the circumstances, the benefits of cloud computing are quite obvious:

• Financial savings – CAPEX is reduced to a minimum
• Pay for actual usage – no need to own excess capacity to deal with peaks
• Shared cost – overhead is shared among all cloud customers

If the evangelists have their way, it’s a no brainer.  A recent Gartner report stated that in 2011 early technology adopters will forgo capital expenditures and instead purchase 40 percent of their IT infrastructure as a service. Other industry analysts have compared the advent of cloud computing to the establishment of utility providers.
In the early stages of industrialism, any one investing in a factory by default had to invest in their own power plants. A few years later a utility sales man – figuratively speaking – showed up with a power cord and rendered the factory owned power plant useless.

So what is cloud computing: frankly put, it’s outsourcing with a twist: not only has your staff (and their computers) left the building, so has your data.

This of course has severe legal implications, the roots of which need to be understood and scrutinized during the sourcing process. In particular sourcing professionals need to ensure that contracts cover the following key issues:

• Data security and data regulation – not only need cloud computing supplier adhere to customer policies but they also need to be able to uphold legal obligations relating to where the customer is based.
• Performance issues – SLA:s are essential and these need to include all aspects of business continuity.
• Contract closure and exit – what happens to your data once the contract is annulled and how will the cloud computing supplier deliver the data?
• Supplier risk – supplier stability is essential; if possible perform a due diligence before entering into the contract to uncover unwanted scenarios.

Keeping in touch with the IKEA philosophy, Liljevalchs promises a  reduced prices of admission – the IKEA classic 69 kronor (a minor reduction but still) – and the exhibition is said to chronicle the rise of the low cost focused home furnishing giant.

The exhibition opens on June 13 2009 at 2 PM – opening day is free for all.

Says David L. Stulb, global leader of the Fraud Investigation & Dispute Services:

“Executives in some companies today may still believe that paying bribes is good business; it “works”. But the risk of such action has certainly increased markedly in recent years.”

The report also concludes that corruptive behavior intensifies in times of turmoil – which anyone working with purchasing cannot have missed. Turmoil leads to confusion which leads to lack of transparency, which is further amplified by the effects of the downturn economy on staffing redundancies which in other cases could have been able to offload the workload to ensure full visibility into the processes.

So what measures can purchasing take to battle these unwanted behaviors?

A clearly defined and communicated purchasing policy is certainly a good start, usage of sourcing tools that ensures transparency and full visibility is also vital as are comprehensive purchasing processes.

On a more transactive level; a no PO/no pay policy in combination with widespread e-procurement adoption is a key lever that can secure that smaller corruption and fraud offenses such as fake invoices never see the light of day.

First, we’ve got the eProcure & Supply – Germany’s largest purchasing and supply management event with approximately 125 exhibitors and an expected attendance of around 3000 purchasing professionals.

Second, and from my perspective a little more interesting is the annual spring unveiling of Aberdeen’s CPO Agenda report; this year subtitled “Smart Strategies for Tough Times”. As always, Andrew Bartolini has done a solid job, yet there are few headline grabbers lodged in the 36 pages.

The one standout metric unveiled relates to 2009’s big spend management topic: supply risk.

“71 % of CPOs believe supply risk is increasing, yet 30% have a formal program in place to manage it.”

Now, that a figure that definitely will be front and center in many vendor presentations as the year rolls-on.

I for one think many more companies actually have a formal risk management program in place, it’s just that it probably did not involve the purchasing department, let alone give purchasing the responsibility to actually own and manage the process.

Fortunately, Roland Berger’s (in co-operation with WHU, Stanford University and ETH Zürich) recent Global SCM Excellence Study takes the factual approach and offers numbers to convert any disbelievers out there.

The main objective of the study was to analyze the impact of strategic supply chain fit on actual company performance (Roland Berger used ROCE to measure the performance) and what they found was that the companies with a supply chain fit outperformed their competitors by 15,5 percent on average.

Furthermore, the study claims that companies with a supply chain fit also outperform their non-fit competitors on ROA (Return On Assets), sales growth and EBIT margin.

• ROA: Outperformed by 5 percent
• Sales growth: Outperformed by 6,5 percent
• EBIT Margin: Outperformed by 3 percent

All in all, the report is good news for anyone struggling to convince skeptics of just how powerful supply chain management can be in achieving operational and financial excellence.

The report is a showcase of what might (and dare I say, often will) go wrong when the power balance between stakeholder, supplier and purchasing is off.

The Audit office has examined four of the Social Security Agencies recent IT-purchases (all quite large and vital to not only the agency as such but to all of their customers, i.e. the population of Sweden) and not only have the Social Security Agency bypassed all regulations regarding government contracts but the audit also found major faults in the purchasing processes as such:

• Low RFP quality, complex yet lacking in specifications
• Too little time give to suppliers in order for them to be able to answer the RFPs in a proper manner

This has led to suppliers declining in participation in the sourcing event.

The audit also found that the purchasing function at the Social Security Agency lacked resources and time to prepare the sourcing event of this magnitude which in turn led to poor quality analysis and reporting regarding which supplier was awarded the contract and why.

Last and not least, the audit found that the power balance between the stakeholder (the IT department) and the purchasing function was so asymmetrical that it could hardly be called a power balance at all. In two of the four projects purchasing chose to bypass all sourcing activity and just call-off consultants on hourly rates on their current frame agreements leading to cost escalation and practically no cost control what so ever. In Computer Sweden auditor Karin Lindell goes as far as saying: There was a WAR between purchasing and IT. 

Due to the fact that so few suppliers participated in the sourcing process, suppliers had their ways and in many cases dictated the terms; for instance one supplier was paid three months in advance(!!!!) and contracts were mostly drawn up to make the Social Security Agency responsible for any delays.

As one digs into the details regarding the different projects it gets really scary. For one SAP project (Customer Self Service) two suppliers submitted bids:

IBM – who bid 84 million SEK – and Logica – who offered a price interval of 25 to 46 million SEK (and someone should have pumped the breaks at that very moment).  Logica was awarded the contract with the motivation that they had submitted a bid which was substantially lower that IBM and the project was due to be delivered in March 2008.

As of today, the project has not yet been delivered and Logica has invoiced the Social Security Agency 77 million SEK and other suppliers have invoiced the agency 63 million SEK.

That puts the tab at 110 million SEK and running, public procurement has surely seen better days.

Once you get past the numbers (which are duly disclosed: total spend, DM/IM&S split, number of suppliers, reduction targets, etc it’s all there) one of the most interesting parts of the story is how Ms Kux and Siemens aim to deal with consolidating spend and exploiting the synergy effects.

Siemens have set up a Supply Chain Management board headed by Ms Kux which includes the CPOs of Siemens three largest business segments (Industry, Energy and Healthcare) as well as the Managing Directors of China and the UK and the CFO of the Industry sector. While there is little possible consolidation of DM spend between the three segments, the boards goal is to lower the complexity of the supply base and exploit the possible synergy effects to a maximum. The composition of the Supply Chain Management Board also reflects the internal policy stating that supply chain, finance and development all need to co-operate more.

Ms Kux concludes that she’s very confident that she will succeed with her targets at Siemens as she’s done it before at Philips. Bringing that amount of experience into the equation is probably one of the reasons she was appointed to the managing board of the German giant as the first woman in 160 years.

One company that recently has started to revisit a more vertically integrated supply chain is Sandvik – one of Sweden’s leading high technology groups, represented in 130 countries world wide with market leadership in stainless and high-alloy steels and special metals. In mid-February Sandvik acquired Wolfram Bergbau- und Hütten-GmbH Nfg. KG (WBH), an Austrian producer and supplier of tungsten products. In the press release that announced the acquisition Anders Thelin, President of Sandvik Tooling is quoted saying:

“It [WBH] provides us with resources to manage the entire production process, from ore to finished cemented carbide powder. In this way we will be able to further strengthen our raw material supply and develop our business and customer offering.”

Given the volatility of the current commodity markets, carefully choosing your supply chain integration strategies is becoming more and more important.