With the run up in product recalls and food concerns last year, product quality and supply risk management have captured the attention of the C-suite and the general public. Supply managers have an opportunity to leverage this crisis to boost their brand in the organization and help their companies turn the strategic balancing of cost, performance, and risk into a competitive advantage. Yet most buyers struggle with where to start and how to secure support across the organization.

Kris Colby, Senior Manager of Ariba’s Spend Management Services group, recently authored a white paper on the subject – An Ounce of Prevention: Steps Your Organization Can Take Now to Reduce the Risk of a Product Safety Incident. I have coerced Kris into summarizing his recommendations in the post below.

Product recalls and safety scares have seemed to reach epidemic proportions lately. And just like any epidemic illness, there are only three ways to deal with it: Prevention, Diagnosis and Treatment

Not surprisingly, the cost and effort involved with each step of a recall increases as you move further across the scale. Full-scale recalls are infinitely more expensive than any steps you can take ahead of time to prevent them. Therefore, prevention is key.

Just as with an illness, there are pro-active steps that your organization can take now to reduce your exposure to supply chain risks.

Good “Prevention” practices can be broken down into four components:

• Sourcing process improvements - By carefully evaluating and selecting suppliers and setting clear and enforceable expectations about performance you can reduce your company’s exposure.
• Supplier site visits - As important as a strong sourcing process is, it does not replace the need for supplier site visits. We do not mean here the “Meet and Greet” where the supplier rolls out the red carpet for your exec’s and has everyone on their best behavior. Instead, these site visits need to be structured properly to capture consistent, valuable information about both current and prospective suppliers.
• Product testing and reporting - Product testing is routine practice at most organizations and is sure to increase given all the recent headlines.
• Supplier Performance Management and scorecarding - A structured supplier grading system will make it easier to drive continuous improvement via consistent and objective measurement as well as provide a single repository for all the information.

No matter how robust the processes and systems you put in place, you will never completely eliminate risk, but by combining these four dimensions of supplier management, your organization will be able to reduce your risk.

Above all, you will have taken every step possible to protect your brand and your customers’ trust.

Sage advice Kris. I encourage Supply Excellence readers to download a complimentary copy of the full report here. I look forward to hearing more from Kris and other Spend Management Services group experts in coming posts.

Continuing on the topic of Supply Chain Finance (SCF), Aberdeen provides actions for companies based on their best-in-class status as highlighted in the report, “The 2008 State of the Market in Supply Chain Finance,” Table 2 below allows you to determine where your organization fits:

When a company sets out to improve its SCF practices, having a holistic approach is important to understand the cross-functional impact of the proposed changes. After defining your organization’s status, Aberdeen suggests the following actions:

Laggards:

• Institute the basic automation capabilities for streamlined AR/AP processing
• Identify areas for improvement.
• Adopt a mindset for the end-to-end financial supply management.

Industry Average:

• Adopt a mindset for the end-to-end financial supply chain management.
• Structure more complex financing programs.
• Select a SCF technology roadmap.

Best-in-Class:

• Integrate physical and financial supply chains.
• Adopt advanced technology.

For more information on this topic or additional information on the actions described above, you can download a free copy of the report by clicking here.

In Aberdeen’s latest report “The 2008 State of the Market in Supply Chain Finance,” the firm seized the opportunity to help organizations embrace SCF programs and the promise of savings and improved financial supply chain efficiencies. The problem to date for organizations is the lack of best practice examples and specific guidelines for the corporate community to follow. Generally SCF projects span multiple departments so it’s hard to understand where the most savings could be derived and where to begin. There’s also confusion about the existing offerings in the services, technology and consulting markets in this area.

As with most major project, establishing a set of critical process and technology capabilities is a must. Take a look at your organization in the areas of process, organization, knowledge and technology – Can you access supply chain financing at various stages? Do you have defined cross-functional goals and metrics? Online visibility into shipments and in-transit inventory? Automated platform to manage AR and AP transactions?

Forty-eight percent of the study respondents report using third party technology to aid in their SCF programs. Thirty percent use in-house developed solutions and twenty-four percent use technology from a financial institution. Regardless of the technology platform, companies adopting SCF technology have reported:

• improved staff productivity due to an automated order-to-pay process
• few invoice discrepancies
• increased visibility into financial supply chain
• reduced / re-deployed staff
• increased visibility into physical supply chain
• improved collaboration with supply chain partners

In the next post, I’ll summarize required actions to address your SCF program, regardless of whether your company falls into the laggard, average or Best-in-Class category. You can download a free copy of the report by clicking here.

Last week Aberdeen published a new report titled “The 2008 State of the Market in Supply Chain Finance.” This report, an update to the 2006 study on the same topic, showed only a slight increase in practical activity in Supply Chain Finance (SCF). Although the level of interest is high, Aberdeen’s research cites that companies are still struggling with the structuring and implementations of SCF programs.

This report is the first time this year Aberdeen interviewed both buyers and suppliers. Interestingly, both sides reported that the lack of knowledge of the supply chain finance best practices is the key challenge to optimizing their SCF practices. Well, good news for everyone as Aberdeen embraced the challenge and focused the report on defining Best-in-Class companies and provided actions for those wanting to achieve this status. The four key areas Aberdeen uses to distinguish Best-in-Class include: average cash conversion cycle, relative improvement in the cash conversion cycle over the past year, days payable outstanding and days sales outstanding. As a preview, the average cash conversion cycle of Best-in-Class organizations is 20 days shorter than the average and 85 days shorter than laggards.

In the next few blog posts, I’ll provide more insights into this report as well as required actions for those wanting to evaluate their SCF program. In the meantime, you can download a free copy of the report by clicking here.

Two years ago, when I suggested that a declining dollar and rising wage and capacity constraints in emerging markets could make the U.S. an attractive “low-cost” region for foreign manufacturers, most of you painted me as Chicken Little. Last year, I awoken your skepticism when I suggested that Detroit and regions of the South that had been abandoned by U.S. automakers for places like China and India would attract more foreign manufacturers due to a skilled and under-employed workforce, aggressive tax breaks, and proximity to the world’s biggest consumer market.

Yet, recent moves by European and Chinese automakers to set up shop on U.S. shores suggest that my predictions were, unfortunately, correct. BusinessWeek this morning reported from the North American International Auto Show (an oxymoron unto itself) that “European automakers, predicting the U.S. dollar will stay weak for several years, are getting more serious about ramping up manufacturing in the U.S.”

This week, European automakers Volvo, Audi, and Volkswagen all announced plans to set up or expand manufacturing plants in the U.S. Volkswagen lead the charge by committing to triple its U.S. sales over the next decade. Company officials said establishing a U.S. manufacturing base would be key to meeting this goal.

Reports surfaced earlier this week that VW was still deciding whether to set up assembly in Savannah, Ga., or Charleston, S.C., due to the cities access to shipping harbors. Charleston looks like the odds on favorite thanks to the automotive supplier network that has been developed there to support the manufacturing operations of another European automaker, BMW.

Meanwhile, Audi said it would build its popular A4 vehicle line in the U.S. Ford owned Volvo said it would move some manufacturing to U.S. shores to avoid Europe’s higher manufacturing rates and logistics costs and duties to import these vehicles in the U.S. And even China got into the act, with announcements this week from four Chinese automakers — Geely, BYD, Changfeng, Li Shi Guangming — sparking speculation that the companies may establish assembly plants in America. (How’s that for irony?)

To be fair, I wasn’t the only supply geek predicting a return to U.S. manufacturing. Last year, General Motors CPO Bo Andersson jumped the U.S. as low-cost hot spot train telling “with a weaker U.S. dollar, the U.S. supply base is more competitive on a global basis.” In fact, Andersson went as far as to reveal that these factors would cause GM to curb previous plans to source more materials from emerging markets, particularly China.

Upshot: U.S. manufacturing could soon see a revival led by some of the very countries U.S. firms once viewed as lower-cost alternatives to American-based supply. These recent moves also signal the official arrival of the global economy — one that requires manufacturers to develop supply based not solely on cost and performance, but also proximity to the consumer. One VW official interviewed by BusinessWeek said it best: “We are waking up to the fact that to be a global player, you have to design cars for the markets in which you sell, not just hope what you do in your home market catches on.”

Oil may have crested at the $100 per barrel mark recently (and is still holding high on production constraints), but buyers should keep a close eye on the rising cost of alternative fuels.

Global markets quaked last week as soybeans sprouted to near-record prices of $11.50 per bushel, the cost of corn reached an 11-year high, and wheat prices mounted a rally. The U.S. Department of Agriculture last week created havoc when it reported that:

• World soybean harvest will fall 6.5% this year
• U.S. corn inventories will be down 20%
• U.S. wheat farmers cut back on production, even as the price of grain doubled.

The culprit? A mix of rising global food needs, coupled with demand for new biofuel alternatives to oil and gasoline.

No doubt the tightening of crop markets has been influenced by the new energy bill President George Bush signed into law before the holiday recess. The new rules call for production of 36 billion gallons of renewable fuel by 2022, including doubling the current ethanol production capacity to 15 billion gallons. The law also includes incentive for biodiesel from soybeans and cellulosic fuels from switchgrass, wood chips, and other agricultural byproducts. (As noted in previous posts, cellulosic fuels hold the greatest opportunity to generate alternative fuels with minimal impact on global food supplies. However, this new power-generation method is less mature than other biofuel generation approaches.)

New rules for cleaner fuel and rising global food demand has sent shockwaves around the world and across industries ranging from farming to clothing, where buyers worry that farmers will be wooed to trade in their cotton fields for more prosperous grain production. In the U.S. food prices have already jumped 5.3%, on average, this year. And that’s nothing compared to increases in developing nations.

Upshot: Don’t just expect to pay more on your grocery bill. At least for the near term, the biofuel rage will drive prices up (and supplies down) for a wide range of products.

With Tata Motors unveiling of its much-anticipated one-lakh (about 100,000 rupees or $2,500 U.S.) Nano car last week, the race to deliver the most affordable car officially kicked into high gear. Analysts revved up positive predictions for the future of the auto industry as automakers around the world scrambled to revive efforts to deliver small, fuel-efficient vehicles to growing middle classes in emerging markets, such as India. (More on this in future posts.)

The excitement around the delivery of an automobile that actual fits the lifestyle and the budget of the emerging market consumer is understandable. Yet, news reports have predominantly focused on the what — a cheap car — and the why — for a growing class of consumers. Few have taken the time to uncover how Tata is able to deliver the unimaginable: a safe, fuel-efficient, five passenger vehicle for $2,500 (air conditioning is extra).

Tata is taking a three-pronged approach:

• Alternative design and materials: Tata has kept the form factor for the new Nano extremely small, with early reviews indicating that the “five passenger” claim will be a snug fit at best. Tata has also elected to sheath the Nano in sheet metal instead of the more conventional plastic. Finally, Tata has elected to use a 33-horsepower engine, which will make the Nano’s top speed max out at 60 miles-per-hour, but yield a fuel efficiency ratio of 50 miles per gallon.
• Low cost manufacturing and logistics: Tata execs say the Nano will be produced and sold only in its home market of India for at least the first three years of production, allowing the company to capitalize on the region’s comparatively lower cost R&D and manufacturing talent. The single market approach will also help the company hold down manufacturing costs by leveraging existing production assets and supply lines and avoiding cross-border shipping, tariffs, and landed costs.
• Better spend leverage and management: Tata will reinvigorate its strategic sourcing approach, extending the use of its e-sourcing and competitive online bidding methods, consolidating spend with fewer suppliers, and improving supplier development and capacity. According to one report, Tata uses online auctions for 45% of its direct materials spending, compared to an average of 15% of spend being e-auctioned by most big auto firms. These approaches will be critical considering the rising costs of sheet metal and aluminum. Tata expects to benefit from buying these commodities from a consolidated base of Indian suppliers. In addition, basic sheet metal cutting and stamping requires less sophisticated suppliers than the more complex plastic-injection molding and assembly used by other automakers.

A little digging reveals that Tata is no stranger to spend and supply management approaches. After a disappointing 2001, when the company lost an alarming 5 billion rupees, Tata leadership launched a three-phase recovery strategy. Not surprisingly, phase one was to rein in spending and improve its procurement and supplier management operations. With an aggressive timetable for savings, Tata used a mix of sourcing automation and external sourcing and spend category expertise (all from a single vendor) to better control its direct materials costs. The company later extended this strategic sourcing approach to indirect materials, particularly industrial MRO.

Tata’s closely-watched Nano is a bellwether of the unconventional approaches it will take to compete in the new world and how supply and spend management will be key to success.

Last week, I shared some of the alternative approaches supply management executives are employing in today’s tightening economic environment. The seasoned sourcing and category experts at my new company would add an additional strategy to the list — apply proven strategic sourcing and disciplined compliance approaches to new spend categories.

One spend category ripe for reigning in this year: marketing. My new teammates put it this way: “Marketing organizations are under constant pressure to find innovative ways to promote their brand. And they must carefully balance their investments across print, online and broadcast channels. With budgets typically very tight, CMOs must identify the right mix of programs and work closely with their peers in procurement to maximize their investments and the returns they generate.”

Indeed. As a new-age marketeer, I am all too familiar with the bullseye enterprises place upon marketing spend. (If I had a penny for every time my former CFO reminded me tat “Marketing is the single largest controllable expense at our company,” I’d be a very rich man.) Having been on both the purchasing and marketing side of this equation, I also understand that supply managers looking to target marketing spend will need to educate themselves on various marketing channels and buying patterns. They must also become fluent in the language of their CMO and marketing managers.

Most marketing types will shut you off if you lead by telling us how much money you can save us. However, if you can demonstrate how you can reinforce brand integrity, speed the turnaround of marketing and print programs, and help me drive more programs from my existing budget dollars, you have my attention.

At 1:00 p.m. Eastern on January 17th, Supply & Demand Chain Executive will moderate a webinar featuring proven approaches on Marketing Spend Management. In the interim, here’s a sneak peek at recommendations on how to cozy up to the CMO to control marketing spend:

1. Get a grip:
   The key to successfully sourcing marketing spend lies in understanding the unique requirements and concerns of key stakeholders and developing an integrated approach to address them. Be sure to allow stakeholders to communicate their needs and be willing to make the trade offs necessary to drive savings without sacrificing quality.
2. Remove the fear factor:
   Demonstrate how cost-efficiency and quality can co-exist and increase the value that marketing delivers through re-pricing and aggregating vendors, re-defining specifications, formalizing processes and tying them to contract compliance, and increasing collaboration with key suppliers.
3. Educate:
   By outlining the value and opportunities created by effective spend management - for instance, money saved can be used to fund additional projects - you can gain the buy-in needed to drive your program on an enterprise-wide basis.
4. Customize your approach:
   Marketing projects have unique requirements that must be taken into account when developing strategic sourcing events. By adapting your approach to account for their nuances and allowing suppliers to outline their creative capabilities, you can adequately compare price and non-price factors to make optimal decisions that align with and advance both marketing and overall business goals.
5. Look beyond technology:
   When it comes to effectively managing marketing spend, software alone is not enough. By leveraging solutions that combine technology, commodity expertise and services, you can more effectively compare suppliers based on unique characteristics and make optimal sourcing decisions that lower costs while increasing quality.

For more details on how to reign in your company’s marketing spend, register for the Marketing Spend Management webinar here.

Eight months after taking the wheel of ailing Chrysler Corporation, former Home Depot CEO Robert Nardelli (and his well-heeled private equity backers) has named a new Chief Procurement Officer. Although who was appointed comes as no surprise to readers of Supply Excellence.

As speculated here back in September, Nardelli yesterday finally tapped his old lieutenant John Campi to lead Chrysler’s global purchasing organization. The reason is simple: As Senior Vice President of Global Sourcing and Vendor Management at The Home Depot, Campi helped fuel the retailers surge to market leadership by keeping a lid on costs and establishing reliable supply lines from far off locales to store shelves. This formula worked well at Home Depot. So why mess with it.

Nardelli is hoping Campi will deliver a repeat performance in Chrysler’s revival, especially in supplying markets outside of North America. But the road to recovery won’t be smooth riding. Although backed by Cerebus Capital, Chrysler is not as well funded as some of its larger competitors, giving it less leverage with suppliers. The company hopes to remedy this issue with increased joint ventures and alliances with other automakers, such as Nissan. The alliance strategy is intended to not only increase Chrysler’s buying power but also to expand its model lines, and to offer access and muscle in regional markets.

The automaker will also continue to face resistance from labor unions as it trims production in North America. And many suppliers, who were key to Chrysler’s first turnaround under Lee Iaccoca, are still smarting from the more heavy-handed tactics they experienced under the Daimler-Chrysler reign.

Despite these factors, Campi seems up to the task. And Chrysler seems committed to having purchasing and suppliers play a leading role in its revival. “Purchasing plays a critical role in cost management and building high- quality vehicles for our customers, and affects every facet of the Company,” Campi said in a company-issued release. “My goal is to take a disciplined approach to purchasing and apply best practices learned from both within and outside of the automotive industry.”

Campi certainly has the pedigree to make good on this mission statement. In addition to whipping Home Depot’s global sourcing operations into shape, Campi served as CPO for Global Sourcing and Logistics for DuPont, giving him ample experience in complex and global manufacturing environments, albeit in the process industry.

Also working in Campi’s favor is that he has had a few months to assess Chrysler’s procurement operations and supply relationships, while serving as a consultant to the automaker. So he is a good position to hit the ground running with a new plan to repair Chrysler’s existing supplier relationships and to develop new sources and supply lines to support Chrysler’s global expansion plans.

Campi’s new vision for Chrsyler’s supply strategy (and Nardelli’s vocal support of it) will not only help the automaker drive toward its goals, it could also help spotlight the strategic impact of the supply management discipline.

Now that the ball has dropped and you’ve bid adieu to 2007, you are probably being bombarded with news reports and e-mails telling you what to expect in 2008. Supply Excellence is also throwing its hat in the prognostication ring, except with a twist.

I’ve spent the past few months speaking with supply management executives about their goals and challenges. Top of mind for supply chiefs: the economy.

The declining U.S. dollar, tightening supply markets, and inflated fuel costs have been a persistent triple whammy to most corporations. And none of the supply execs I spoke with are banking on any relief in 2008. The Vice President of Procurement at one large process manufacturer summed it up best: “Prices, driven higher by energy costs, are once again our major concern.”

And, as with other economic downturns, such market dynamics will prove a a blessing and a curse for supply managers. History has shown that when the economic going gets tough, CEOs and CFOs turn to the procurement and supply management organization for help. The current crisis provides an opportunity for supply managers to elevate your strategic position within your company.

The bad news? Tighter supply markets and a weaker dollar will require you to throw out the rule book for negotiating and managing spend and suppliers. For many commodities, traditional negotiation tactics — such as reverse auctions — won’t deliver the savings you have come to expect. Your CFO will likely give tougher scrutiny to your spend savings claims. And you’ll once again be asked to drive additional savings without additional resources.

To succeed in this environment, supply managers will need to adopt alternative negotiation and spend management approaches. Here’s some recommended tactics to achieve and sustain your spend and supply management goals in 2008:

• Adopt alternative negotiation approaches: With the prices of certain commodities continuing their skyward rise, buyers are no longer in the driver’s seat in many markets. Wringing the best value from negotiations with suppliers requires the use of alternative negotiation methods, such as flexible bidding or optimization-based sourcing, which allows suppliers to differentiate their solutions on multiple parameters beyond price and enables them to suggest alternative bundles or offers. Companies like Sun Microsystems and ITT Industries have actively embraced such alternative negotiation tactics. Several buyers noted that they were engaging in longer-term commitments with suppliers competing in tighter supply markets.
• Rethink your low-cost country sourcing strategy: With rising labor costs, tighter monetary policies, and tougher environmental scrutiny, China is losing some of its luster. Throw in rising fuel and transportation costs and sourcing from China and other faraway emerging markets are not as fiscally attractive as it once was. Such factors have prompted many supply management organizations will begin retooling 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. As stated here before, General Motors has reassessed its global supply base and sourcing decisions based on total landed cost and global business objectives. And other companies are viewing low-cost sources closer to home. Others firms, such as 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.
• Optimize your spend position: Tighter supply markets and a weaker U.S. dollar will require supply managers to devise new ways to improve their spend leverage. This will require improved visibility and analysis of existing spending . Improved visibility will not only provide greater insight into where you are spending your dollars, but it can also help you identify new negotiation advantages. For example, improved spend visibility offers new understanding of parent-child relationships (i.e., determining which suppliers in your roster are part of a larger, common parent company), allowing you to improve your spend leverage to negotiate more favored terms with a given supplier. Likewise, improved visibility can help you uncover purchase price variances with given suppliers to ensure that you are maximizing the prices and volume breaks you spent so much time negotiating.
• Manage demand: One of the best ways to save money is to not spend it. Or, more precisely, not spend it unnecessarily. Several supply management execs noted plans to improve their ability to identify and aggregate purchasing demand for specific goods and services — such as new hardware — across business functions or divisions and use this leverage to negotiate favored terms using a quick RFQ. Similarly, other companies have begun standardizing purchasing requirements — such as defining common configurations for new laptops or standardizing similar parts into a single, standard specification — to improve negotiation leverage and turnaround with suppliers.
• Improve cash management: Faced with a tighter economy, supply managers (and other functions) need to take a more active role in improving working capital. Buyers are quickly learning that automating the invoice reconciliation and payment process can yield some dramatic improvements in costs and cash flow. Celent Research finds that automating can reduce invoice processing costs by as much as 92%, while electronic settlement can slash payment costs by up to 86%. And working capital improvements will improve exponentially when the improved visibility and efficiency enabled by EIPP are used to make rapid, fact-based decisions that dynamically balance cash and rebate management. As noted here in previous posts, such dynamic or aggressive rebate management approaches can yield 2% to 20% discount offers off the originally negotiated price from suppliers that are eager to get paid early.
• Embrace sustainable supply strategies: Last year I predicted that 2007 would be the year that environmentally and socially responsible supply strategies go mainstream. And many of you didn’t believe me. Well, moves by Hewlett-Packard, Wal-Mart, Sun Microsystems, and others clearly indicates that the sustainability movement has already begun. This year, tighter environmental regulations from China and the U.S. (coupled with the need to offset supply price increases and risks) will drive most of you to employ sustainable supply strategies. The smarter in the bunch will find ways to leverage these approaches to lower supply costs, secure supply, and drive greater sales and profits.

Tough times require tough (or, in this case, alternative) measures. Now’s the time for supply management organizations to shine. The above strategies can help ensure your success.