Supply management may finally be getting its due. Not only is the function being recognized as a strategic corporate initiative, but supply managers are also getting pay hikes.

Results of Purchasing Magazine’s 26th annual salary survey show average compensation for the supply management field rising to $83,205, a 6% boost over last year. (Read Purchasing’s synopsis of the survey here. The full 2006 salary report is available for a limited time if you register.)That’s slightly off pace from last year’s increase, but well above boosts for salaried workers in other professions, such as engineering.

As evidenced in previous Supply Excellence posts, much of the pay hike can be attributed to a simple fact: there isn’t enough supply management talent to go around. Taming today’s uncertain global supply market requires new skills that elude many veteran procurement professionals. New talents, like financial acumen, technology know-how, and engineering skills are high in demand. Other attributes, such as project management and marketing savvy, are also important for managing and selling supply management improvement initiatives. Companies that cannot find these skills on the open market have taken to poaching senior supply management executives. (And, in some cases, they’re poaching entire supply management teams too.)

Studies from The Hackett Group and comments from CPOs draw a clear link between pay levels and the ability to attract and retain top talent.

If you’re a supply manager, develop the above talents to demand a top salary. If you’re a supply management executive, don’t jeopardize sustained supply success by shortchanging your best employees.

While the Bush Administration and civil rights groups debate the balance between national security and racial screening, one type of profiling that is without controversy is category segmentation. In fact, it’s encouraged by everyone — except maybe commodity suppliers in a highly competitive marketplace.

I came across a compelling framework on the Strategic Sourcing Europe blog for profiling your spending into four distinct categories: standard, commodity, strategic, and bottleneck. Based on Michael Porter’s five forces model, the framework segments spend categories based on their business impact and their supply market complexity. The graphical framework also provides recommended supplier engagement and relationship management approaches for each segment.

For example, for commodity suppliers with low supply market complexity, the framework recommends “exploiting your buying power” by expanding your supplier options, using volume leverage, and negotiating aggressively. For strategic suppliers in markets with high complexity, try “creating competitive advantage” by engaging in joint development and strategic alliances.

This segmentation approach is by no means rocket science. It isn’t even original. (In addition to borrowing from Porter, the approach bears a striking resemblence to what I have previously described as wise-sizing your supply base.) But Strategic Sourcing Europe does provide an easy-to-understand visual and actionable framework. And everyone loves a nice picture.

See for yourself, here.

Last week, I used the disparities in costs of The 12 Days of Christmas to encourage Supply Excellence readers to apply e-sourcing techniques to all spend categories. The use of online sourcing methods — whether e-RFx, reverse auction, or sealed bid — has been proven to provide the competittion and market transparency required to yield additional supply cost concessions above and beyond traditional methods.

Today, I’d like to share a simple litmus test that top-performing supply management organizations (e.g., Sun Microsystems, ITT Industries, Compass, and others) use to assess whether a good or service should be reverse auctioned. I have compiled a composite list of four questions leading organizations use to determine which categories are ripe for reverse auction:

1. Can you define clear specification for the category?
2. Is there a competitive supplier pool?
3. Is the spending or unit volume significant enough to be of interest to suppliers?
4. Are you prepared to change suppliers based upon the auction results?

If you can answer “Yes” to these questions, then reverse auction is a viable negotiation method. If not, consider adopting other e-sourcing techniques, such as e-RFx or sealed bid.

Returns from PNC Wealth Management’s 22nd annual survey of the costs of gifts in the holiday classic, “The 12 Days of Christmas,” unwrapped a 3.1% increase over last year. PNC pegs the increase on low unemployment and rising service costs. But a peek under the tree suggests that the boost was due to PNC’s heavy reliance on sole sourcing and outmoded sourcing processes.

According to PNC, the cost of the 12 Days climbed to $18,920, thanks in large part to supply constraints and increases in wages for nine Ladies Dancing, Lords a Leaping, and various musicians. But the biggest boost came for the price of a Pear Tree, which climbed 44% this year, due to robust demand for ornamental trees for landscaping in commercial construction. (See PNC’s full cost rundown below.)

Click to enlarge.

Now, I don’t claim to be a category expert in the Maids-a-Milking market. (Although I do have some experience sourcing drummers — but only when packaged with an eight-piece swing band.) However, a little historical digging on the Web revealed that PNC continues to use many of the same vendors each year to assess the costs the 12 Days’ goods and services. (The Philadelphia Dance Company seems to be PNC’s perrenial favorite.) And there is no evidence that PNC used competitive bidding to secure true market transparency.

By comparison, Barron’s Online reports that it managed to spend only $6,066.95 on the 12 Days by comparison shopping on the Internet. That’s 80% less than PNC paid. It’s also a 32% decrease from Barron’s 2005 tab for the same items. Barron’s claims to be “value conscious” but there was no word on how product or service quality compared to those purchased by PNC. (Unfortunately, access to the full article requires a Barron’s Online subscription, which is too high-priced for my holiday budget. So, I am unable to provide further detail.)

Regardless, the disparity between the two reports illustrates the measurable impact of combining strategic sourcing methods with true market transparency and competitive bidding enabled through online tools.

Industry reports find that e-sourcing yields an average of 14.2% cost savings above and beyond traditional sourcing methods. And users report savings even on their most frequently sourced and well managed categories. Finally, as noted here in previous posts, there is ample evidence that e-sourcing can be applied to complex business services, such as print, advertising, legal, temp labor, and consulting.

In short, when it comes to e-sourcing, there are no sacred cows. Online sourcing tools have come a long way from their roots at tactical, price-only reverse auctions. In fact, depending upon the e-sourcing solution, even reverse auctions now support the competitive negotiation of multiple price and non-price factors.

Whether it be software development services or 11 Pipers Piping, everything can be e-sourced. And much of it can be reverse auctioned. (More on that in my next post.)

For your New Year’s resolution, I challenge you to question authority. Overcome the naysayers that grumble, “…this category is too strategic, complex, or unique to be sourced online…”). Instead, start from a position of “Why can’t this spend category be e-Sourced?” Make your category managers — and reluctant stakeholders — prove why not. If the cost differential of traditional versus online sourcing noted in the above 12 Days’ costing exercise is any indication, your company will be glad you did.

Like a lump of coal in your stocking, Gartner VP and Research Fellow Andy Kyte portends price increases and supply constraints for 2007.

In an interview earlier this week, Kyte told European Leaders in Procurement (ELP) that “…with the price of materials such as plastic and metals increasing, it looks as though CPOs are going to face a whole new set of challenges over the next 12 months.”

But other experts contend that there may be a silver lining in commodities prices yet. Although, prices for copper, nickel, and zinc all hit new record highs earlier this week, some market watchers predict that base metals prices will be lower in 2007.

Moody’s reports that metals prices could cool in 2007, thanks to slowing demand from the U.S. And Purchasing Magazine’s prognosticators offer a mixed bag: “…since the dollar is expected to keep weakening next year, the prices of gold, silver, and platinum group metals will continue to escalate through 2007.” Purchasing pegs the increases to bullish demand, political uncertainty, and insufficient production capacity. And they suggest that China may be hording gold, boosting prices for the precious metal high for years to come.

(Jessica Mahre, VP of Operations at A.T.Kearney, offers tips on how to combat China as a competing consumer of raw materials and other goods in the latest SupplyNow podcast. Listen to her advice here.)

However, on the plus side Purchasing says prices for nonferrous metals “are expected to retreat in 2007.”

One thing is certain: navigating the supply market environment in 2007 will only get more complex. In his ELP interview, Kyte offers the following advice for supply management execs: “It’s essential that CPOs analyze their markets carefully so they can identify areas where shortages may occur at the earliest opportunity and then formulate plans to deal with them.” He also recommends that supply managers consider alternative (and possibly longer term) supplier relationships to “ensure they can still source the kind of quality products that are required.”

Kyte also wisely suggests that CPOs and commodity managers be proactive in setting expectations with stakeholders and executives that price increases may be on the way.

A previous Supply Excellence post highlights how Compass Group, one of Europe’s largest food service providers, has become proficient at setting such expectations when sourcing in the volatile food marketplace. The Compass supply squad uses pre-briefings and deal sheets to prep stakeholders and execs on market dynamics, sourcing approaches, and pricing and supply trends for certain items. A Compass sourcing executive says the approach prepares stakeholders for what to expect from each sourcing event. It also helps the team prove the value of strategic sourcing by beating prevailing market price increases.

Upshot: supply uncertainty requires extra diligence. Be proactive about assessing market dynamics and communicating realistic expectations to your team and other stakeholders. 

Episode two of the monthly SupplyNow podcast is now available. This month, the collaborative series between Supply Excellence and Spend Matters, tackles the highly contentious subjects of China, spend visibility, and the future of Detroit.

Our featured guest, Jessica Mahre, Vice President of Operations at A.T. Kearney, shares insights into the do’s, don’t’s, and the future of China sourcing. Jessica’s unique perspective pulls from her own personal experiences sourcing and managing supply from China (as well as other Far East regions) first as a commodity manager for electronic components and assemblies and now as a leading China sourcing consultant.

Jason fires up the spend visibility debate (a personal favorite subject of his). And I chime in with the surprisingly favorable results of General Motors supply management turnaround plan.

Don’t miss a word. Download the latest edition of SupplyNow today.

IACCM President and CEO Tim Cummins recently penned an article on the challenges of balancing the need for contracting standards and innovation in the face of a rapidly changing global economy. Tim warns that risk avoidance and the litigious nature of our society has led contract and legal organizations to err on the side of too much command and control. In his opinion, stringent checks and approvals and rigid and standardized contracting lanugage often leads to complexity that threatens long-term control and constrains business relationships. Not to mention elongating contracting cycles.

The answer lies in a new approach to contracting — one that applies the simplification principles of lean manufacturing and management to the contract management lifecycle. I have excerpted Tim’s advice on what lean contracting might look like. The full article is accessible at the IACCM web site.

For many companies, the pressures to reduce cost have already driven the adoption of standards and they typically enforce these through software applications, such as ERP or spend management. The owners of these tools see their role as maintaining control and monitoring compliance. They believe it is good to limit deviations and therefore even requests are discouraged or suppressed (and as a result, we have no record of the extent or frequency of change requests).

In the face of rapidly changing market conditions, we have introduced a strait-jacket that blinds us to market trends and destroys creativity and innovation. To make matters worse, US-based corporations face the additional burden of regulatory compliance that adds to the climate of fear and the cost of change.

Complexity is not going to disappear any time soon. Change shows no sign of slowing. How can we balance the need for control and low cost operations with the imperative of flexibility? Is the only answer to pile in more resources?

The key to survival in the 21st century is the development of organizational competence through superior use of information and knowledge. The truth is, we still operate in a world of heroes - deal-makers, procurement specialists, lawyers and project managers who snatch recovery from the jaws of disaster and excel at fire-fighting. We focus on transactional review of contracts and relationships and individuals hoard knowledge and experience, rather than contributing to organizational learning and corporate competency.

In our new world, we must think in terms of faster and better integration between market needs and business capabilities. Relationships across the supply chain must be kept aligned through terms that create flexibility to adapt. These are tough challenges when change is so rapid. They are unachievable if resources remain organizationally fragmented and transaction or project focused. To succeed, we must consolidate data and experience.

What does this mean? At an organizational level, we see the emergence of process-based competency groups charged with overseeing both efficiency (quality) and effectiveness (value). They will do this through a service delivery model driven by business and market information and monitored through strong performance metrics aligned to corporate goals and strategies. In most cases, the central resources are likely to operate as a shared service center that is evaluated by the business units - and which in turn evaluates the performance of those business units. (more…)

Aberdeen Group’s latest report, The CPO’s Strategic Agenda, discusses how new pressures are forcing supply management organizations to hire talent with unconventional backgrounds. In recent years, we’ve seen an increase in the number of recruits with finance, engineering, and technology backgrounds added to the supply management team. The Aberdeen report cites a company adding marketing expertise to its supply squad.

“I hired a sales and marketing person to evangelize the benefits of procurement throughout our organization,” said one CPO cited in the report. ”The results have more than justified the decision.”

The trend reminded me of a discussion I had earlier this year with Jessica Dunlop, head of ITT Industries’ e-sourcing program. ITT has taken a different approach to the talent crunch: tapping other functions for details on commodity trends, cost drivers, and suppliers.

“For travel, we found that the people with the best insight were the secretaries that booked travel on behalf of our executives,” said Dunlop. “They gave us the most insight on the travel specifications and the historical service performance of the travel companies.”

ITT’s experience reveals a secret that few enterprises care to admit. Office administrators are responsible for a large portion of corporate buying decisions and execution. The International Association of Administrative Professionals reports that there are more than 10 million admins in the U.S. alone. By some estimates, these admins direct or execute nearly $200 billion worth of purchase decisions each year.

And their purchasing power extends beyond just air travel. Other key categories where admins have supplier selection and purchase-decision influence, include: small parcel and courier services, transportation, dining, break room supplies, desktop computing, events, subscriptions and memberships, printing, and gifts and logoed merhandise.

In most cases, administrative assistants are placing purchase requests on behalf of their bosses. They also control access to executives that can secure budget and support for your supply management initiatives.

That means the success of your next program can hinge on your ability to win over office admins. A good rule of thumb for supply management teams: make every day Secretary’s Day. Some suggestions:

• Sell admins on how your latest e-procurement or compliance initiative will make their lives easier.
• Take admins to lunch to educate them on your program. And don’t cheap out. Make it a nice lunch, or your plan may backfire.
• Let admins test drive potential travel booking, e-procurement, or contract management solutions — before you make a selection. Solicit their feedback for improvements; and ensure these changes are implemented.
• Consider personal incentives — gift certificates or dining vouchers — for admins that get their bosses’ spending in compliance.
• Survey admins throughout the program to monitor satisfaction and head off any compliance issues that may derail your program’s progress.
• Hold an annual “Unsung Hero” award for the admin that helped save the company the most by complying with your program. (Be sure to throw in another nice gift for the winner. Maybe a night out. Or a day at the spa.)
• Most importantly, be nice. Never be rude to or try to go around an adminstrative assistant. You’ll likely fail. And you’ll earn an enemy for life. (”Hell hath no fury like an admin scorned.”) Admins talk. So make an enemy of one, and your program is sunk.

Too often supply management execs and analysts (and bloggers) get caught up in the importance of thinking strategic. But don’t forget that all business is personal. And, in many cases, is controlled (or at least influenced) by the personal assistant.

Last week, I had the opportunity to moderate an excellent session on spend analysis best practices. The esteemed panelists shared many gems of wisdom on how to launch a success spend analysis program. I won’t rehash these here. (You can listen for yourself by accessing the free replay.)

However, one off-subject line of discussion raises an interesting (and oft heard) question:  We know we need to improve our supply management operations. But where is the best place to start?

Greg Shifflett, Director of Enterprise Spend Managemetn at Alliant Tech Systems, says to “Get a handle on your spend first,” adding that spend visibility provides a solid foundation to identify and prioritize opportunities for sourcing, category, and supply base improvements. Greg also notes that accurate, detailed, and timely spend data has also helped secure both top-level support (including from the CEO) and frontline compliance. “CFO’s really want to know how it’s going to get to the bottom line, how it’s going to track, and when it’s going to be there.”

Greg’s slide below illustrates Alliant Tech Systems’ three-year supply chain overhaul below. (You can access Greg’s complete slide presentation, “Spend Visibility: Foundation for Supply Management Transformation,” here.)

(Click to enlarge.)

As the graphic indicates, Alliant Tech is using its foundation of accurate and timely spend intelligence to define category management and sourcing (and e-sourcing) strategies. Next, the company will move to automate supplier registration and performance scorecarding, followed closely by contract management. The final phase of Alliant Tech’s transformation plan will be to automate the procure-to-pay cycle.

This methodical approach reinforces the importance of securing a baseline and targeting improvements in areas that can deliver the quickest and greatest impact on supply costs and performance. It also signals a shift from the approaches of the late 1990s, when companies rushed to streamline req-to-pay processes before determining if they had fully leveraged, best-value agreements in place with the best suppliers.

To borrow an old advertising slogan: “We’ve come a long way, baby.”

There is an old saying, “You can tell a lot about someone by the company they keep.” In the supply management world, you can tell a lot about an organization and their strategies (and, even, their likelihood for success) by what they measure.

Evidence of this fact came through in Aberdeen Group’s latest report, The CPO’s Strategic Agenda. The far-reaching study covered many aspects of supply management challenges and approaches. One of the most compelling sections focuses on the key performance indicators (KPIs) used to measure supply management efficiency and effectiveness.

According to Aberdeen, the Top 10 Procurement KPIs in use today ranked in order of priority are:

1. Negotiated cost reduction savings
2. Implemented cost reduction savings
3. Percent of total spend under management
4. Cost avoidance
5. Procurement ROI (savings/operating costs)
6. % of suppliers accounting for 80% of spending
7. Supplier performance (price, delivery, quality, service, etc.)
8. Contract compliance
9. Requisition, PO, or invoice transaction volume
10. Subjective feedback (structured, survey-based)

Report author, Vance Checketts, warns of the dangers of focusing too heavily or narrowly on specific metrics: “Unfortunately, negotiated cost savings is still more prevalent than implemented/realized cost savings. This is problematic because the former is at risk of never reaching the bottom line.” The challenge, writes Vance, is for the supply management organization to “take ownership of the savings” and ensure that they are fully realized.

The leakage that occurs between negotiated and implemented savings is quite dramatic. Aberdeen’s innagural CPO Agenda study reported that the typical company only implements about 70% of the savings it negotiates. Chief culprits of savings leakage include lack of communication of supplier contracts to requisitioners and insufficient policies and systems to enforce compliance.

The CPO at a global high-tech manufacturer summed it up best when we recently had lunch, “You only truly have spend under management when you are both applying strategic sourcing methods and standardized compliance methods to that spend.” In short: Procurement savings don’t count until they hit the bottom line.

Vance was also wise to question the absence of metrics on the list that link procurement to key financial performance metrics that are watched by CFOs, CEOs, and investors, such earnings per share (EPS) and Return on Invested Capital (ROIC). These points are well covered in Doug Smock’s book Straight to the Bottom Line as well as in his previous posts on Supply Excellence.

While Vance’s example focused on negotiated versus realized savings, his broader point should not be overlooked. No single metric defines supply management success. (Although, I personally believe that spend under management, as defined above, comes pretty darn close.)

I welcome Supply Excellence readers to share their own views on what are the right metrics to measure and balance supply management performance. Post your ideas in the comment section below or e-mail me directly at tminahan@supplyexcellence.com