Ever wonder what your CEO is thinking? Well, a new study of 443 C-level executives from Saugatuck Technology and Business Week Research Services purports to have the answer. Here it is:

(Click image to enlarge.)

Okay, stop laughing.

There really are some valuable insights buried in that chart — even if they’re not presented in the most coherent manner. (Sound like any CEO’s you know?) Of course, getting the full details and analysis on what’s behind the chart will cost you. The research duo is currently charging $595 for the full report, C-Team Research: Growth and Innovation Driving the Global Business Agenda.

But the report overview and a recent post on SandHill.com from Saugatuck Founder and CEO Bill McNee give a pretty good synopsis. According to the report, growth and innovation are top of mind for C-level executives. In fact, the top five business goals of top execs are all revenue, customer and market share growth related. By comparison, cost control, budget management, and ROI measurements were way down the list of what the C-suite cares about.

Writes McNee: “Revenue growth outpaced both cost control and asset allocation by a 5-to-1 margin as the top business strategy for C-Team executives.”

These findings send a clear message to supply management executives: your CEO doesn’t care about costs. Or, more correctly, cares less about costs than other areas — mainly growth.

The point: If your supply management group is myopically focused on reducing costs, you are misaligned with the strategic business agenda. If you don’t change your current approach and mindset, you’ll forever be viewed as a tactical support function — not a strategic contributor to corporate value.

Winning the minds (and budgets) of company leaders will require you align your sourcing and supplier management straetgies to the key objectives of your business — whether they be creating the next-great technology, captilizing on new sales opportunities in emerging markets, or winning the hearts and wallets of consumers through socially and environmentally responsible business practices.

How? By doing your job. You are the gateway to the innovation inherent in your supply base. You are the scouts on the opportunities and hazards of emerging markets. You understand the cost, performance, and environmental and social implications of your company’s buying decisions (and increasingly those of your suppliers’ buying decisions). Start capitalizing on these strengths.

So stop talking about year-over-year cost reductions. And start developing strategies and metrics on how supply management is helping drive innovation, market expansion, and top-line revenues and profits. Keep a scorecard of your supply team’s contribution to enterprise value. And, most importantly, be sure to share it with your company executives. You’ll be surprised at the doors such value-based thinking will open.

When I posted my 2007 predictions for the supply management discipline earlier this year, one projection caused considerable backlash: “You will rethink your low-cost country sourcing strategy.”

I argued that the risks, lead-times, and hidden costs of emerging market hotspots — particularly India and China — would make these faraway regions less attractive as sourcing destinations. Recent reports of rising wages, currency instability, and infrastructure issues, only buoy this argument.

I claimed that these factors would prompt smart supply management organizations to retool their global sourcing approaches to better reflect total costs — especially landed costs — and to better align with their company’s global manufacturing, sales, and customer support strategies. And pointed to General Motors, Toyota, and Honda, as examples companies are rethinking their LCCS strategies.

Supply managers and ardent free traders raged at the idea. Even yesterday’s post prompted a call from supply management exec saying, “Risks or not, the cost basis I can get in China and India is still too good to pass up.” Maybe so. But some of the world’s leading companies beg to differ.

In fact, findings from a new study from A.T. Kearney, strongly suggest that near-shore destinations — particularly Argentina, Brazil, Chile, Costa Rica, and Mexico — could could unseat traditional offshore regions, such as India and the Philippines. Already manufacturing hotspots, Latin American regions are becoming attractive centers for outsourcing services.

According to the report, Destination Latin America: A Near-Shore Alternative, companies, such as GM, Procter & Gamble, American Express, and Unilever, are shifting to supply sources and service centers closer to Latin America. And top business process outsourcing (BPO) vendors, such as TCS, Infosys, and IBM, are setting up shop in the region.

What’s the attraction? The report, which is an offshoot of the A.T. Kearney Global Services Location Index (GSLI), finds that “Latin America has what many U.S. and some European companeis want: low-cost Spanish-language capability and a growing, relatively low-cost, skilled bilingual workforce. In addition, Latin America time zones and cultures are closely aligned with those of the United States.”

Beyond time, language, and cultural affinities with the U.S. and Western Europe, A.T. Kearney states that oustourcing services in Latin America — from IT maintenance, software development and operations, to full BPO — are highly competitive on a skills and cost basis versus those offered in traditional offshore regions. A.T. Kearney reports that Latin America offers an average BPO savings of 20% to 40% compared to the U.S. and Western Europe. That’s better than average services cost savings available in Eastern Europe (15% to 25%) and only slightly lower than BPO savings available in India (35% to 50%).

A.T. Kearney argues that high turnover and wage creep in India and other Asian countries will only improve the arbitrage advantages in Latin America over time: “One of the major challenges that India, the Phillipines, and other Asian locations face is retaining personnel, especially in the overnight shifts that are so crucial to supporting customers in the United States.” The report cites annual attrition rates in Asian call-center hubs ranging from 20% to 100%, while turnover at BPO centers in these regions range 10% - 30%. By comparison, attrition rates in Latin America range from 10% - 25% for call centers and only 5% for captive and shared service centers.

According to A.T. Kearney’s research, Argentina is the most attractive region from a cost and skills basis, however, it lags in political and economic stability compared to other Latin American countries, such as Costa Rica, Chile, Mexico, and Brazil. The report includes detailed capabilities and risk assessments for each country in the region as well as some valuable case studies of multinationals sourcing (and outsourcing) from Latin America today.

The report is a must-read if you are just starting an LCCS or outsourcing initiative or if your existing global sourcing approach has stalled. It also provides convincing evidence that it may be time to rethink your LCCS strategy.

No one would dispute that China is fast becoming the manufacturing capital of the world. But this new-found status comes with challenges. Mainly, manufacturing plants require lots of power. Power requires oil. And therein lies the conundrum.

While supply managers in the U.S. and Europe have been bragging about securing “the China price” for goods and services sourced from the region, China has been quietly cutting deals to snap up already scarce oil sources around the globe.

Just this week, China penned joint venture deals to double its purchase of crude and fuel oil from Venezuela and to increase oil imports from Russia by 50% this year. China also this week entered into a joint venture with South Korea to jointly develop overseas oil resources around the globe. This week’s events follow China’s recent plans to step up investment to increase oil production and imports from Africa, particularly Sudan, but also Algeria, Zambia, and South Africa. China is still among the biggest importers of oil from Iran.

I can hear some of you saying, so what? The U.S. gets most of its oil from Iraq, Kuwait, and Saudi Arabia. Iran is on America’s “evil” list. And anyone who’s spent a week on Spend Matters knows how much the U.S. despises Venezuela. So who cares if China gets its oil from those sources. It doesn’t impact price of power in Detroit, right?

Wrong. The below chart from Gibson Consulting on U.S. oil consumption tells quite a different story. And raises some serious cause for concern.

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The U.S. is heavily dependent on foreign oil, importing some 60% of its annual needs. Of that, the U.S. gets less than 20% of its oil from the Middle East. More than half of U.S. oil imports come from the very same countries China is targeting, including the 10% of imports that come from Venezuela. (In fact, Venezuela President Hugo Chavez views the China deal as a way to reduce his country’s dependence on the U.S. as a customer.)

China’s recent moves have the potential to constrain the flow of oil to the U.S. (and Europe) from these regions. It could also boost already sky-high oil, gas, and energy prices. That, in turn, will not only raise your company’s energy bill, but will likely push up prices for manufactured goods. Rising oil prices are a particular concern for those supply managers buying petroleum-based products, such as plastics, or for products that require significant energy to produce.

Understanding this geo-political landscape can help supply managers devise sourcing and supplier strategies to better manage risks and hedge prices and total product costs over the long-haul.

Over the weekend, Spend Matters had an insightful post on signs of the emerging recession. In his post, blogmaster Jason Busch warned supply managers to step up their focus on cost management.

My opinion: Bring it on!

While bad for business, history proves that recessions are good for the supply management discipline. Why? When the going gets tough, CEOs and CFOs turn to the supply management team for help:

• In the 1970s, executives viewed consumption management and increased control of supply chain performance and costs as the antidote to the energy crisis.
• In the 1980s, new procurement and supplier management techniques were used to ward off lower-cost, better-quality products from offshore competitors, which, at the time, were primarily from Japan.
• In the 1990s, supply management was tasked to lead the charge for continuous improvement initiatives, such as total quality management (TQM), just-in-time (JIT), and Six Sigma.

Now, with global competition heating up, risks increasing, and supply markets tightening, executives will once again make supply management a priority. Savvy supply executives will use this crisis as a lever to secure the resources, budget, technology, and policy changes required to drive their improvement initiatives. They will also leverage the economic downturn to demonstrate to secure a seat at the executive table.

One word of advice: be certain this go around to use this new-found status to demonstrate how supply management can do more than hold down costs. Demonstrate supply management’s value contribution potential by helping to identify innovation in the supply base, expand into new emerging marketplaces, support corporate compliance initiatives, and develop sustainable supply approaches that can reduce risks and boost long-term profits.

Last week’s diatribe on the requirements for the new era of supply management caused quite a stir. While all commentators agreed with the principles of Supply Management 2.0, some argued that many supply organizations are not yet prepared to embrace this new responsibility.

I agree with this assessment. (That was the point of sharing examples of supply management organizations that were either misguided in their thinking or stuck in a rut. Or both.) However, I refuse to accept current deficiencies as a fait accompli.

This need for change was driven home in a conversation I had last week with an old acquaintance, Jeff Wincel, former Big Three procurement manager and former head of purchasing and supply chain operations at Donnelly Corporation, a leading Tier One automotive supplier. Jeff has summarized supply management transformation practices of these organizations into a must-read book: Lean Supply Chain Management: A Handbook for Strategic Procurement. He has since founded LSC Consulting Group to help companies employ these principles for supply management improvement.

Jeff reinforced the need to set aside such group think, arguing that supply management will never advance as a strategic discipline without accepting a new mindset:

“The fundamental mindset change that must be made is that procurement and supply chain organizations should not be treated as cost center support services, but as potential profit centers. This is possible only when executive management recognizes the potential profit contribution of strategic supply chain management and understands that the improvement potential of such an organization far outweighs its overhead costs. It is then that true strategic supply management can be effectively deployed.”

Securing executive support for supply management transformation won’t just happen. You will need to help frame the dialogue for executives, so they understand not only supply management’s current contribution to the business, but als your vision to transform the function into a center for value creation. (Read this for tips on how to gain executive support.)

In the spirit of lean simplification, I boiled the characteristics of a Supply Management 2.0 organization into the table below. Feel free to use this table both as a litmus test to diagnose your current supply management competence and as a framework to set your path for improvement.

To learn the techniques your peers are using to drive supply management transformation and improvements, register to attend the Supply Management 2.0 forum in a city near you.

I regret to report that I’ve recently had a number of disturbing conversations with supply management executives from around the globe. Their comments clearly indicate that, despite all the blustering of bloggers, analysts, and even CPOs, the harsh truth is that, on the whole, the supply management discipline still has a long way to go:

• Consider this comment from a VP of Supply Chain at a major high-tech manufacturer: “We agree we should get more involved in helping with product development and inventory strategies. But those functions have their own goals. And we continued to be measured on one thing: year-over-year cost reductions.”
• Or the CPO of a global consumer products company: “We just completed an assessment of our source-to-pay operations and have decided that we need to start our transformation by automating requisitioning and cataloging. We’ll get to sourcing and supplier management later.”
• Or boasting of the newly appointed Director of Global Purchasing for one of the world’s largest providers of lumber and custom materials: “When I came on board, I wanted to shake things up. I told all our carriers that they had until next Friday to lower their rates by 10% or they’d lose our business. The logistics group, DCs, and business units were up in arms, afraid we wouldn’t be able to ship our products. Suppliers had the opportunity to call me and plead their case. Most of those that wouldn’t lower their rates were cut. But, in the end, we secured a 6.5% discount across the board. That sent a message that we would be doing things differently from now on.”

My response: Bad. Worse. And downright neanderthal.

Old school approaches like these focus narrowly on creating internal efficiencies and reducing spend. Sure, these heavy-handed tactics can deliver measurable results. But how much, how fast, and for how long? There is mounting evidence that these traditional approaches can expose enterprises to unforeseen supply risks and offer limited sustainable impact. And they are certainly insufficient to capitalize on or even survive in the new global economy.

Transformation requires not only near-term impact, but also long term sustainability. Contrast the above mindset and approaches with Toyota’s insightful development and long-term commitment to labor and suppliers in recessed regions (like post-industrial America) or with innovative technology (like hybrid engines) but inadequate capabilities for volume manufacturing. Or Hewlett-Packard’s “buy-sell” relationships with key contract manufacturers or their much-heralded recycling and sustainable supply programs. Or how Abbott Laboratories is using improved spend visibility to drive savings and performance improvements and to give supply management a seat at the strategic merger and acquisition (M&A) table.

In short, we have entered a new era of supply management, one which requires a new mindset, new skills, new strategies, and new technologies both to thrive and survive. This new era is best described as Supply Management 2.0. (And not just because the name has a cool ring to it.) Supply Management 2.0 is the next-generation of supply techniques designed to drive long-term and sustainable improvements in supply costs, performance, and value impact. Supply Management 2.0 is an era where:

• the supply management function looks beyond driving internal efficiencies to optimize visibility, efficiency, and performance across a constantly-shifting, global network of supply partners.
• sourcing decisions and subsequent supplier management strategies are based not just on price or even total cost of ownership (TCO), but on overall network performance, risk management, and the value impact of supply on core business goals and differentiators.
• automation investments provide comprehensive functionality and decision support for the complete supply management lifecycle — from initial spend visibility and analysis through continuous performance measurement and improvement.
• the supply management team is entrusted with (and contributes value to) a broader portion of corporate spending and strategic business goals.
• the supply management function is measured not just on near-term cost reductions, but the ability to contribute value to the business — in the form of supplier innovation, risk management, and continuous improvements — on a long-term and sustainable basis.

I was fortunate enough to have the opportunity to discuss these Supply Management 2.0 concepts recently with Supply and Demand Chain Executive Editor-in-Chief Andy Reese. You can listen to our conversation by downloading the associated podcast here.

Even better, we’ve recruited a number of CPOs and supply management executives from leading enterprises around the globe to share how they are putting these new principles and techniques to work at their own organizations. And they’re coming to a city near you.

I’m happy to announce that Supply Excellence is about to hit the road again for the second annual Supply Management 2.0 Forums, a series of free, half-day events designed to showcase how leading organizations are putting supply management best practices to work and to foster networking among procurement, contract, and supply management executives. We’ll be visiting a number of European and U.S. cities on the Spring leg of the tour, so check here for a city near you.

Forum attendees will get a chance to hear first-hand how companies like Barclay’s, ITT Industries, UPM, Alliant Techsystems, Federal Signal, National City, Key Corp., Novation, and more are employing new strategies and technologies for supply management excellence. I will be previewing these enterprise case studies here on Supply Excellence in the coming weeks.

But I strongly encourage you to register to attend a Supply Management 2.0 Forum to hear first-hand how your peers are embracing these new concepts for competitive and sustainable advantage.

If you’re like me, your e-mail box is loaded with newsletters, research alerts, event invitations, and other “news” sources that seemed like a good idea to subscribe to at the time. These virtual infomercials do occassionally carry some valuable nuggets on best practices, category trends, or tips you can use to improve your supply management operations.

Yesterday’s mail call included one such gem. Buried in yet another direct mailer from Aberdeen Group (How many reports can these guys put out anyway?) was an intriguing promotion to download the latest benchmark report: Winning Strategies for Transportation Procurement and Payment report.

According to the ad, the key theme of the study, which was based on a survey of 380 companies, is that best-in-class performers are far more advanced in their sourcing and carrier management approches than their peers. Specific stats cited in the ad indicate that best-in-class companies are:

• 1.6x as likely to let transportation carriers bundle and unbundle lanes in their responses.
• 1.7x as likely to use multiple bidding rounds with their carriers
• 1.4x as likely to use a procurement application rather than spreadsheets or manual processes.

These findings reinforce the concepts put forth in yesterday’s post on best-value sourcing and supply management. To get beyond best price, savvy supply managers are embracing alternative negotiation methods and advanced sourcing automation and decision support tools that enable discovery and assessment of a myriad of price-, non-price, and conditional factors. These tools also enable supply management to better engage other stakeholders in sourcing and supplier management processes and to better align supply management strategies with the goals of the business.

The above stats from the Aberdeen’s transportation report are not surprising. Sourcing optimization tools and flexible bidding methods are most widely used for a discrete number of complex categories — primarily transportation and packaging — that have multiple variables, inputs, processes, and handoffs or parties involved.

For example, last month I was speaking with a global airline alliance that conducted an optimization-based project for ocean freight service, which aimed to balance the requirements and preferred supply strategies (i.e., selecting a single global ocean freight carrier versus a multiple regional shippers) of its members. The project assessed multiple variables, including transportation charges, drayage, leadtimes, delivery performance, and tariffs and landed costs across various routes. Such collaborative and complex negotiations would have previously been a labor-intensive process, taking the better part of a year to complete. With optimization-based support, the project was completed within two months — from initial requirements collection through final award decision.

However, savvy supply management organizations are beginning to apply the above methods to a broader range of spend categories. (more…)

A Supply Excellence reader comment to yesterday’s post reaffirmed the sense I’ve been getting from recent conversations with supply management executives: Everyone talks about best total value supply. (You can’t puruse a software vendor’s web site — including my employer — without being accosted by value terminology.) But few truly understand what best-value supply is. And even fewer are negotiating and managing supply relationships for best total value.

The comment came from a supply chain manager who is employed at major third-party logistics (3PL) provider. His point focused on the issue of balance-of-trade and how having a supplier is also a customer must be factored into overall sourcing and supplier management strategies, but it reinforces the difference between lowest total cost and best value supply.

“I have found that procurement folks tend to live in their own world. When we look at our own roster of customers and our list of vendors, there is remarkable commonality. We look at first costs the same way a retailer would…[but] we look at changing the terms of sale to favor our control.”

I have tried to pull together an easy-to-understand diagram below, defining best value supply and how it varies from best-price and lowest total cost of ownership (TCO). (The latter being what most enterprises — and vendors — confuse with best value.) The chart also illustrates the technology approaches typically used at each stage and the pros and cons of each technique.

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Best Price 

As the chart indicates, the traditional best-price approach is relatively straightforward and easy to implement. (My purchase price last year was X. This year, I paid X - 5%. Look at all the money I saved the company.)

The deficiencies of this approach are also clear: First, is the 5% discount I negotiated better or worse than the market price? Second, did my company (and the supplier) actually implement or achieve the full savings I negotiated? And, most importantly, what about all the other costs associated with doing business with that supplier (e.g., transportation and handling fees, landed costs, partial shipments, missed deliveries, poor quality, etc.)?

Online sourcing approaches, such as e-RFx and basic, price-only reverse auctions, enhanced the ability for supply and category managers to determine the best price. But at what cost?

TCO

Many enterprises are transitioning to a TCO approach, which incorporates all price and non-price factors (e.g., logistics and handling costs, landed costs, switching costs, set-up costs, transaction costs, etc.) into supplier negotiations and tracks price and contract compliance (e.g., quality, perfect order status, etc.) to ensure TCO goals are achieved. Widespread adoption of this TCO approach requires the use of advanced automation and negotiations, including spend analysis, multi-variant/total-cost-based auctions, and flexible bidding to allow suppliers to make alternative bundles and offers that differentiate on more than just price. (more…)

In the midst of my current spend analysis fever, I came across this interesting factoid about the shifting dynamics of U.S. industry:

“Twenty years ago, the top 100 companies in the Fortune 500 either dug something out of the ground or turned a natural resource (iron ore or oil) into something you could hold,” wrote new-age marketing and business guru Seth Godin. Today, two-thirds of the Fortune 100 traffic in services or ideas (e.g., labor, transportation, consulting, etc.)

This shift from a manufacturing- to services-based economy, begs two questions for supply management organizations:

1. Will services make up a greater portion of my total spending?
2. If so, is my company prepared to manage services spending?

The answer to Question #1 is a resounding, “Yes.” U.S. companies spend more than $1.5 trillion on business services annually. That means that more than one-third of all corporate purchasing dollars are spent on services. In select industries, services comprise as much as 85% of total spending.

Unfortunately, the answer to Question #2 is “Unlikely,” at best. Research from Aberdeen Group finds that “nearly half of all services purchases are not controlled by the purchasing department.” Instead, sourcing and purchase decisions are made by various business functions, such as human resources, marketing, or engineering.

There are a number of challenges to effective services procurement. (For more details on these, access research from Aberdeen or AMR Research. Or listen to what blogger and services procurement solution exec John Martin has to say.) This post will address one of the biggest services procurement challenges: the lack of detailed visibility into services spending.

In last week’s webinar — Beyond Spend Visibility: Turning Data into Action — one audience member asked a question that I hear quite a bit: Purchase orders (POs) and invoices often lack detailed information on the services being purchased. How can spend analysis really help provide visibility into services spending?

According to webinar panelists, the answer to this question relies on both the automation approach and classification schemas you use.

“It comes back to the kind of automated sourcing tool you’re using,” said Forrester Research Vice President and Supply Management Research Lead Andrew Bartels. ”Neural networks are able to interpret the wording in the invoice, which is typically where this arises. It can also be done with rules-based [cleansing and classification] engines, which can search for key phrases or key terms and interpret the invoice for use for classification.”

Adding to Andy’s comments, it is important to note that top performers also use a triangulation approach where the spend analysis solution marries the invoice information with PO line descriptions (e.g., “professional engineering services”). In the case where services spend details are not in a PO system, the solution will also access and interpret spend from other systems and non-PO data sources, such as administrative check requests (ACR). The approach depends on the unique buying patterns and spend details of the enterprise and its systems.

Todd Grunert, Purchasing Manager of Supplies and Services at Abbott Laboratories, was even more direct: “It’s really all about the taxonomy,” noting that Abbott developed its own spend data taxonomy based on a combination of industry schemas, including SIC, NAICS, and UNSPSC. This enabled Abbott to expand the taxonomy to support detailed classification for complex services categories like print and consulting. It also allows Abbott to map spend back to these industry classifications for high-level reporting and analysis. (more…)

Countless analyst reports and enterprise testimonials (and even research conducted by Supply Excellence) point to the benefits of automated spend data management and analysis solutions. Automating data extraction, classification, enrichment, and analysis processes have been proven to improve spend visibility and leverage, enhance compliance rates, and uncover opportunities for cost savings of 2% to 12%.

Despite such positive indicators, many companies still ask the question: “Do we really need spend analysis automation?” The answer, according to Forrester Research, depends on the complexity of your company’s business and technology environments.

In a webinar last week — Beyond Spend Visibility: Turning Data into Action — Forrester Vice President and top Supply Management Analyst Andrew Bartels shared the simple reference below to help enterprises assess whether they should prioritize investments in spend analysis automation:

(Click image to enlarge.)

As the above graphic indicates, Forrester argues that enterprises that will benefit most from automated spend analysis solutions are those that:

• compete in multiple markets;
• compete across multiple industries; and
• have spend and transaction data spread across multiple ERP and legacy systems. (Not to mention all the external systems — e.g., P-card, ACH, 3PLs — that hold important spend data.)

This is a helpful (if simplistic) diagnostic. On the same webinar, Todd Grunert, Purchasing Manager of Supplies and Services at Abbott Laboratories said his company, which has grown through multiple merger and acquisitions, must capture spend data from over 70 sites around the globe. “Doing this manually was not a viable option for us,” said Grunert.

Considering its systems and business complexity, Abbott may be the penultimate validation for Forrester’s spend analysis assessment framework. Yet, Bartels was quick to point out that the framework should only be used as a guide: ”Even in a single ERP, single industry environment, the benefits from getting much more granular detail on your spend data can be significant.”

Indeed, a previous Supply Excellence post details the experience of a global technology company that thought it would solve its spend analysis problem by standardizing on a single ERP system. After the fact, the company’s supply team quickly realized that ERP systems are built for high-level financial analysis and lacked the detailed, line-item attribute data needed for meaningful spend analysis.

For example, ERP standardization reaffirmed what the supply team already knew – it’s company spent a lot on hardware. But the ERP data didn’t help commodity managers determine how much was being spent on high-end SPARC stations versus laptops. Nor could it shed insight into whether these items were being bought for development engineers or office administrators.

The company eventually adopted a solution to automate spend data collection, classification, and analysis, yielding opportunities for 5% cost savings on A and B spend categories (i.e., those they felt they had previously sourced and managed effectively) and 15% savings on categories that had been sourced and managed inconsistently. (Read the full case study here.)

I will be profiling the highlights from Forrester’s and Abbott’s presentations on spend analysis later this week. In the interim, listen to the replay or download their presentations for free here.