Purchasing Transformation

At the moment Stockholm is draped in a gorgeous cover of pristine snow – it’s a glittering prize to quote The Simple Minds. Unfortunately, a snowy winter also has it’s downsides. The traffic situation is in a state of chaos, public commuting is crippled and many supply chains are struggling to keep up.

In a press release Green Cargo – Sweden’s leading rail logistics carrier – point the blame at the Swedish Rail Administration for poor handling of the situation.

“The rail logistics volume has been halved and companies are severely affected” says Mats Hollander of Green Cargo.

Stora Enso’s information officers echo’s the sentiments from the supply side in a Dagens Industri article:

“We have goods that are going nowhere”

Now it would be easy to just slap on a few ppt:s regarding risk mitigation and leave it at that, but the problem when it comes to logistics and the impact of infrastructure is that even though there is risk awareness there just might not be a simple answer to the question of who’s to blame.

Just to expose some of the complications of an issue such as this:

• The Swedish Rail Administration has the overall responsibility for the rail transport system in Sweden.
• Green Cargo – and other logistics providers – are dependent on a functioning rail transport system to be able to carry on business.
• Stora Enso – and other suppliers – are dependent on logistics providers to deliver the goods.
• The Swedish Rail Administration has sub-contractors (suppliers) that are responsible for rail maintenance.

These suppliers have been sourced just as any supplier should be – yet I doubt that much focus was placed upon the issue of snow and ice in the RFP/I (statistics buffs can gawk at the fact that statistically there was no winter in Sweden at all last year – counting days of sub-zero weather). And the suppliers are now in the business of investing 15+ MSEK into machinery that is vital today (and stands un-used the remaining part of the year).

So the trouble of getting supplies and goods through today, with ice and snow delaying services, is not an easy one to solve since it’s not only affecting the supply chains using the logistics services that have faulted. The supply chain for rail maintenance has been undercut by sourcing hard and low (clearing snow is not profitable). And with a market that demands low prices; there is no upside to keeping snow clearance equipment as back-up.

Everyone is seeking a scapegoat – the problem is that we all know you can blame the weather.

With the Olympics in full swing – the Nordic countries are flooded with self-promoted experts who spend their days digressing who will take the most prestigious medals on snow (for those of you outside of our cross country crazed region it’s time to place your bets on Kalla, Björgen, Northug, Cologna, Hellner, Kowalczyk, Majdic or Saarinen). And with the speculation of glory comes (of course) the analysis of technique, material, weather and failure.

Host city Vancouver is at sea level and critique has been frequent regarding the decision to hold the Olympics in an area which cannot boast impressive numbers when it comes to (winter Olympic) necessities such as snow and icy temperatures (as this is being typed, 4000 tickets have just withdrawn from the snowboarding arena at Cypress Mountains due to rain and the unavailability of snow – which is being trucked in from Manning Park 250 km west of the city – now that’s a supply issue not dealt with often). I would have loved to be a fly on the wall when the risks were discussed as Vancouver was chosen to host the games.

The warm temperatures have also increased the focus on the tracks for the cross country skiers as well as the technique necessary for mastering the adverse – and in many cases unusual - conditions. Years of preparation hasn’t prepared the experts for preparing skis for tracks laced with fertilizer - much like the “new normal” that legio in global purchasing of today,

And this is where purchasing professionals should listen up and take notice – because there are numerous similarities between making the most of a supply chain and skiing fast in the conditions faced around Vancouver at the moment.

Germany’s biathlon poster girl Kati Wilhelm neatly summed up the challenge she and many others are facing in a recent interview with SVT: “I’m a ‘heavy’ skier, and I need to change my technique to float on the snow in order to stay competitive”. Now what she means is that she’s a power skier who applies a lot of pressure downwards as she propels herself forward. In perfect conditions with an icy track this is a great way to create traction and maintain velocity but in the slush that surrounds Whistler its like “running a marathon in clogs” (to quote Swedish biathlon coach Staffan Eklund).

Unfortunately this type of practice is what many purchasers still see as their main activities. They apply heavy pressure on your supply base to ensure low cost.

What one needs to do in Whistler at the moment is to balance pressure with release – there are many skiers who are known for this – the ability to float on top of the snow – making the most grueling races look effortless. What they seem to do is apply pressure downwards to get traction and increase velocity and once they’ve achieved this they release much of the pressure and let the skis do their job to sustain the momentum.

Put into the world of spend management this is the equivalent of applying pressure by securing a competitive environment in sourcing activities and still enabling suppliers to feel freedom (as well as security) as the contract runs to ensure that innovation is captured, flexibility is maintained and quality is sustained (and even improved).

Apart from all the other spend management related issues going on in Stockholm at the moment – this week is also one of Stockholm’s fashion weeks. At first sight, high fashion might be as far away from classic corporate purchasing as is possible – low runs, design focused, pricey, you name it – yet last year big fashion talk of the town was all about supply chain management without lost focus on the design and fashion end of the spectrum.

This fall saw the dawning of a new swedish designer jeans brand (adding further competition to a marked blurred by hipster faves such as Nudie, Acne, Cheap Monday, Filippa K and Whyred) – Noko Jeans.

When other designers start with pen and paper and demin – Noko had another thing in mind. A North Korean supply chain.

It took the guys behind Noko 2,5 years to get 1100 jeans produced. So much for a lean supply chain.

The Noko-website does a great job when discussing the issues and ethical questions that arise when dealing with suppliers in countries that are »off the map« for most purchasing organizations. Highly recommended and in my mind there is a great management type book buried in this story.

The trials and tribulations of Saab continues – after months of rumors and cliffhangers, GM finally decided to sell Saab to Spyker last week. And although the deal is far from finalized, things seem to be falling into place – a great relief to the Saab/GM supply base.

So with Saab production finally at go-ahead all things should be rosy, right?

Well, not quite. For nearly a month GM has been steadfast in their decision to liquidate Saab. Vital to the liquidation process has been the cancellation of ordered parts, a decision that now – for the new owners – has brought on a new headache: supply shortage.

Saab used their in-stock parts to build 100 cars last friday – but today the plant in Trollhättan is at a stand-still. There are no parts to build cars from.

Getting the supply chain back on track will take up to two weeks according to spokes persons at Saab.

I’ve spent the best part of the last month and a half contemplating my life – taking care of my kids, listening to music, getting involved in two book projects – generally lazing about being utterly unproductive. And by accident, ignoring this blog and my publishing responsibilities.

So has this spend management hiatus been beneficial. Well to be honest, just like in the case of any interuption – two months down the line I’m back where I left off. A little behind my peers, playing catch up.

Recently The Economist (January 9th-15th issue) hid a rather interesting story on how Boing is planning to avoid these types of issues in the future. As many of you surely know Boing has had it’s share of supply chain issues that has delayed the 787 Dreamliner on numerous occations – the most famed being the Machinist union 57-day walk-out that cost Boing more than $2 billion dollars plus loss of business as some potential clients switched their orders to Europe’s Airbus.

So in late 2009, Boing responded by announcing that it will replicate the supply chain for all Dreamliner parts made in Washington so that their new South Carolina plant can operate independently. To avoid further interuptions in their much delayed production schedule Boing has sourced a second supplier for every part.

Now this tactic may be as far away a step from single sourcing and “winner takes all” negotiation tactics as one can ever imagine, but in the drag race for the sky between Boing and Airbus it actually makes sense.

Now if only I had though of this two months ago – getting a replacement me to handle my job as I went wandering. Then maybe I would be getting up to speed faster than I am at the moment.

I know that I’ve mentioned the brilliance of Hans Rosling before but he recently stepped into the limelight again as he made Foreign Policy Magazines  100 Top Global Thinkers list. I hope all of you have seen what professor Rosling does with data – it’s mindboggling to say the least, yet what struck me this morning was his clear take on the world of today. In an interview in Svenska Dagbladet he commented that the world is no longer divided into a developed and an under-developed  world, there are numerous levels in between and we need to understand this.

“We need to have a fact based world view and [unfortunately] we do not.”

From a supply management perspective this cannot be emphasized enough. In our state of volatile new normal bringing the facts into the open and making sense of them is of utter importance. Supplier information may be in vogue, but without strategies and ideas of how to analyze and visualize the indicators that may be found in this well of data chances are that one may be steering as blindly as before.

Over at Procurement Leaders, the staff reports that in the UK the “flood of jobless procurement pros creates ‘challenging’ environment” for those looking to staff up their procurement functions. Not only is there a bigger talent pool that needs to be navigated, but in many cases there are great retention risks involved as many companies hire over-qualified staff to fill the vacancies.

Last year I edited a book called “Purchasing Tranformation” and in it Björn Stenecker provided a solid skill mapping model which he had used to great effect when dealing with hiring, rentention, development and coaching issues of purchasing functions.

Simply put the model spreads 20 or so criteria across four dimensions which are graded on a scale of 1-5 for both the individual hire/employee and the role.

Education

• Level of education

General competence

• IS/IT
• IS/IT – ERP knowledge
• Project management
• Budget
• Business development
• Strategy development

Specific competence

• Purchasing skills
• Negotiations
• Contracting
• Supplier development
• Category expertise
• Logistics

Personal skills

• Leadership
• Analysis
• Communication
• Cooperation
• Stress handling
• Initiative
• Accuracy
• Flexibility

This model can be used as self assessment in the recruiting process for new hires to quickly see which candidates fit the proposed role. It is also a brilliant tool for seeing in which direction one could develop over-qualified staff in order to retain the competence in the company.

Low cost country sourcing has been on the agenda for a number of years. Over time the best cost country has shifted from certain countries to others depending on labor costs, quality of goods produced, infrastructure etc.

The difference in labor costs are often appealing but after taking transportation and warehousing costs, costs for capital tied (depending on payment conditions), delivery times, import duties, as well as things like cultural differences, flexibility in deliveries etc. into consideration the case is often not as obvious as it may seem.

Over the course of last year some currencies like the British pound or the Swedish Krona have dropped significantly. The GBP/USD (-28% since July -08) or the SEK/USD (-35%) exchange rates have fallen drastically, whereas the USD/CNY rate has remained more or less at the same level during the same period (EUR/USD has fallen 10-15%-points less). Similar pattern can be seen amongst the EUR/GBP/SEK vs. the Indian Rupee. For many products where the savings are important but still only in the range of 10-15% (taking all of the above into the calculation) if sourcing from e.g. China these savings have quickly been eaten up.

So, are countries like UK and Sweden emerging as the new low cost countries?

Well, two things must be factored in. Is the potential supplier financially stable (more important than ever in these times), and will the currency remain at that level? If you are able to assess the supplier’s stability and you are able to move production from your supplier in a reasonable time period should the exchange rate become unfavorable again it is time to start looking at these new “low cost” countries.

For a long time the availability of talent has been a limiting factor for achieving purchasing excellence in many companies. Now, in the downturn, the availability of skilled staff is obviously higher in basically all professions. But there are reasons to believe that the current availability of top talent purchasing professionals is greater than for other professions.

Why? The reason is simple. The best purchasers have always been found in industries that A) has a high purchasing spend as a share of their turnover and B) are highly competitive. For example,  the automotive industry has a purchasing share of some 80% and is extremely competitive. They have always been the forerunners in developing purchasing excellence. On the other extreme we have utilities: Low purchasing spend and low competition ( the latter mainly due to state regulations or even monopolies). And it is clear that the companies in the thoughest markets are hit the hardest by the downturn. No wonder that GM and Saab (both great companies in purchasing) are about to go bust while the Swedish state monopoly Vattenfall slashes out some 8 Bn Euros (!) when buying a Dutch utility.

So if you are the CPO in a company that is still standing up: this is your chance to drastically improve your organisations performance.

A month ago Fortum – one of the leading power companies in the Nordic region launched their first recharging stations for plug in vehicles in Stockholm. To date four stations are active and the company plans for 100 to be installed by the end of 2009.

I pass one of these stations as I bike to work every day. It’s strategically located across the street from the city hall – something that seems to be the thing to do when setting up a new infrastructure, Coulomb Technologies just did the exact same thing when they unveiled their first charging station in San Jose a few weeks ago  and it’s going to be a thrill to see how this initiative will fare in the future.

From a supply chain perspective the interesting thing about this initiative is that Fortum (in the Stockholm region) is set on building a power infrastructure for a currently non-existent market (currently there are about 300 plug in vehicles registered in Sweden), banking on the automotive industry to start delivering plug-in cars for a mass market. According to reports from the Detroit Automotive show this will be a reality in a few years as almost all auto-manufacturers have at least one plug-in model set for release. In a classic egg or hen scenario it seems that the power grid will be in place before too many cars will be lining up for power.

The cool thing about many of the suppliers of plug-in stations is that they are almost to an end using existing parts – the Fortum recharging station is basically a modified engine pre-heating supply, something that’s been commercially available in the Nordic region for decades – to deliver a new service. The Coulomb solution used in San Jose utilizes existing light poles for its power supply.

The promise of a new generation of cars is already forming a new industry segment and from the look of it, none of the traditional fuel providers seem to be taking charge (no pun intended).