Straight to the Bottom Line®

An Executive's Roadmap to World Class Supply Management

Robert A. Rudzki, Douglas Smock, Michael Katzorke

• Publisher: J. Ross Publishing
• Year: 2005
• Print ISBN:
  9781932159493
• Edition: 1
• eBook ISBN:
  9781604276268
• Topic: Business
• Subtopic: Operations
• Index: Business

Straight to the Bottom Line will enable senior corporate executives to turn the enormous top-line and bottom-line potential of supply chain and procurement into reality. Key Features --Provides a clear understanding of the performance improvement opportunities, and what is at stake if these opportunities are overlooked, written by and for senior corporate executives --Outlines a powerful and logical approach for assessing the state-of-the-art in their organization --Offers ways to estimate the specific opportunities related to implementing a change in strategy and practices --Details a comprehensive framework for organizing the transformation plan, across multiple dimensions --Gives advice on which areas to focus on first, in order to build and ensure success --WAV offers free downloadable resources such as a presentation detailing how modern supply management can improve ROIC and a lost opportunity calculator to quantify the impact of "maverick buying" — available from the Web Added Value Download Resource Center at jrosspub.com

I

Executive Assessment
Pre-transformation

1

The Opportunity

It is not the biggest nor the strongest nor the most intelligent that will survive. It is the species most adaptable to change.

—Charles Darwin,

author of The Origin of the Species

An incremental annual investment of $20 million can save $1 billion over a three-year span.

That’s not theory. That’s happening at a $40 billion North American–based manufacturing company today. The incremental investment is in people and technology: the real payoff is in working smarter by managing supplyside costs more effectively.

Most companies, even some of the most glittering among the Fortune 1000, do a poor job of managing external costs. That concept was relegated to the purchasing function, which in turn was shoved in the back office and treated like the Siberia of corporate culture. In smart companies today, purchasing is a holistic part of corporate function and strategy and is not treated like a stand-alone function. Nor are engineering, manufacturing, logistics, and sales. They are all marshaled to address a company’s cost structure — as well as its top-line growth.

Smart companies tap the power of their supply base not only for best-in-class technological innovation but also for supply chain improvements that can dramatically improve return on invested capital (ROIC) through actions to improve revenues, reduce costs, and improve the capital intensity of the business (see Figure 1.1). A key driver for improving shareholder value is to ensure that the ROIC exceeds the company’s cost of capital. Modern supply management can improve ROIC in many ways, including actions to improve margins and actions to improve asset utilization.

Figure 1.1. Modern supply management can improve ROIC in many ways. (Source: © Copyright Greybeard Advisors LLC. All rights reserved. Reprinted with permission.)

What’s really cool is that software leviathans are awakening to the promise of these treasures and developing increasingly powerful IT solutions that leverage the Internet to multiply the savings potential and add speed. And the reason extremely few companies are doing this well? Poor executive leadership.

The reality in Western business is that only a few companies have both assigned a strategic role to purchasing and sustained that role over time. Other companies have assigned a strategic role to purchasing for a period of time, or until a new corporate priority (or fad) moves into the top slot. Most companies have not yet fully realized the enormous opportunity that purchasing offers.

For the most part, the tools for success (explained later in this book) are available to everyone. The processes, technology, and best practices are reasonably well known and available.

The big challenge seems to be internal to the organization itself. Key executive-office issues are a lack of understanding of the opportunity presented by improved supply-side performance; lack of active support for purchasing; poor choice of leader for the purchasing function; incorrect reporting relationship between the chief procurement officer and the executive suite; a lack of alignment between corporate, financial, and purchasing objectives; and most importantly, a weak or totally lacking mandate.

The purchasing issues include the following factors: the top person is not a true leader, skill sets are missing or deficient, purchasing objectives are not shared with other key stakeholder departments (such as operations or engineering), and best practices are not understood or embraced.

For the most part, corporate purchasing has competently done what it was told to do. For most of the past 50 years, purchasing was a discipline that processed purchase orders, negotiated contracts, and made sure that stuff arrived on a timely basis. That was about it. That’s all purchasing was expected to do. In that same period of time, the world of business turned upside down. Western manufacturers were driven by Japanese competition, energy shocks, rapidly improving technology, and various competitive pressures, such as shortened product life cycles and reduced barriers to entry (see Table 1.1).

All played a role, but the most stunning driver of the past four years was the economic downturn combined with what many refer to as the “Wal-Mart effect” — the ability of large companies such as big-box retailers to demand strong year-on-year price reductions. Even major brand manufacturers such as Procter & Gamble could not count on price increases to cover rising costs. For most of the 20th century it was a given that if inflation rose 4%, you could hike your prices 5%.

Purchasing was expected to minimize cost pressures and “make something happen,” with the “what” defined by someone else and without purchasing’s involvement. In other words, the process by which a decision or strategy was made often did not involve purchasing and often was a process that was generally not inclusive of other disciplines. The result was declining competitiveness and profitability.

One of the first companies to get whacked was Xerox Corp. A Japanese partner, Fuji, could make copiers for up to 40% less, triggering a massive recreation of Xerox. CEO David Kearns felt Xerox was headed for total collapse in the 1990s and launched a turnaround that featured all classic aspects of the supply chain, including a bigger role of suppliers in design and manufacturing. Product development time was slashed by a year and manufacturing costs were cut 50%.¹

Supply side was front and center because external costs represented 80% of total cost of goods sold. Commodity management was centralized on a global basis. The supply base was hatcheted, with emphasis on partners that could boost quality. Suppliers were invited to participate in development projects.

Table 1.1. Competitive Pressures Force Change

Most of the dramatic changes and the best learning come from companies like Xerox that went to the wall and had to reinvent themselves.

Chrysler Corp.: Lee Iacocca led a restructuring in the 1980s that included a major focus on suppliers, even for R&D. Purchasing executive Thomas Stallkamp recalls: “We had no choice; we had very little funds for research.”² For example, development of body panels for the Viper was turned over to supplier teams around 1990. Normally, suppliers never communicated with each other because all details were kept secret by purchasing. In the Viper project, companies that made products such as adhesives, fiberglass, and resins sat, talked, and made trade-offs that allowed for the most efficient development that was possible. The result was a powerful, lightweight car that could accelerate from 0 to 100 miles per hour and back to 0 within 15 seconds. Plus the project was completed with a very small R&D outlay. Chrysler went from the corporate scrap heap to star. Stallkamp was named president and later left when new German owners had a different approach. Soon Chrysler was once again mandating across-the-board cost reductions to its supply base. And Chrysler once again was a weak performer.

IBM: IBM’s stock lost $6 billion in value in the early 1990s despite the company’s technical and scientific brilliance. Losses from 1990 to 1993 were significant. It was a supply chain train wreck. Even IBM’s own employees declined to use employee discounts to buy expensive personal computers.³ CEO Lou Gerstner arrived in 1993, and two great hires followed: Jerry York as chief financial officer, who in turn hired R. Gene Richter as chief procurement officer.

In personal discussions, Richter told us his job “was easy” because he had complete support from his executive sponsor, Jerry York. He made one big change: he boosted the role of suppliers. IBM for the first time began sharing confidential information with its major external partners. He made another very important, but simple, change: he required written sourcing plans for all purchased products. Purchasing transactions became electronic overnight, and Richter predicted that all IBM purchases would move to the Internet — a task that proved almost impossible because of once-a-year transactions with small vendors with minimum Web capabilities. Richter made purchasing a revenue generator when he sold a purchasing services contract to United Technologies. Today, purchasing is a major component of IBM’s Global Services business. At leading-edge companies today, such as Intel, purchasing contributes revenues in an even more significant way: patent royalties.

Harley-Davidson: Like Xerox, Harley in the 1980s was getting hammered by Japanese competitors on cost and quality. It was a classic engineering-driven American company. Engineers didn’t consider the big commercial picture — like what the bike would cost. Engineers typically look internally for solutions and don’t tap outside expertise. And that’s a shame because suppliers know their technologies best and they know best practices for use of their products. In the mid-1990s, Harley management saw the light and launched a turnaround that included supply management. In 1995, Garry Berryman was hired from Honda of America, where he had learned to trust suppliers. He split the purchasing department into two groups, one focused on product development and the other to perform more traditional purchasing activities. He recruited top-level engineers from schools such as MIT to work with Harley design engineers and suppliers’...

Table of contents

• Cover
• Read the Reviews
• Title
• Copyright
• Table of Contents
• Foreword
• Preface
• Acknowledgments
• About the Authors
• Web Added Value™
• Part I. Executive Assessment: Pre-transformation
• Part II. An Executive Roadmap to Successful Supply Management Transformation
• Part III. Post-transformation: Best-in-Class Examples from Supply Management Transformation
• Part IV. The ABCs of Best-in-Class Practices
• Epilogue. A Few Final Words from the Co-authors
• Appendices
• Source Notes