Have you ever been in a meeting with an internal stakeholder who doesn’t want any help on their category because it’s too complex, or is the creative service that can’t be effectively sourced or managed by anybody but the supplier and that stakeholder himself? Then this story is for you…

In the Business Week article “The Cheapest Suits in Hollywood”, Ron Grover tries to explain the recent financial success of FOX. One piece of course is having movies that people want to see - including my children’s’ favorite Horton Hears a Who. The second piece is making those movies for less money than anybody else.

Horton, which features the voices of Jim Carey and Steve Carrell, was made for just over $85 million. According to Grover, that’s nearly half of what a typical Pixar animated feature costs. But how do they do it?

The most interesting strategy appears to be on Special Effects, where FOX has hired an “in-house effects czar,” i.e. a category manager to control the cost and value of special effects used for FOX film projects. Unfortunately, they don’t identify this film world supply management pioneer by name, but they do talk about some of the strategies they employ:

• Competing special effects houses to get the best price
• Multi-sourcing - using several shops on a single project to take advantage of individual strengths and maintain competitive pressure

What can you take away from this?

FOX staffed this position based on an understanding of their spend - where controllable costs exist on their film projects - and made a strategic investment in staff that would have the knowledge that could make a difference in controlling those costs. Which categories in your organization make a material difference in financial success and what is your source in category knowledge?

Second, the strategy outlined in the article leaves most of the decision making to the producers of the individual films. While FOX certainly plays a role in managing negotiations and influencing strategy, most of the raw decision making is left in the hands of film producers. Just about every sourcing organization I know has, at one time or another, gotten bogged down in real or perceived dilemmas of who will be “in charge” of a category that can be the equivalent to Napoleon fighting a winter land war in Russia.

Think about the strategies used by FOX Studios the next time you go to work on a complex category and you’ll improve the chance that your project will be “green lighted.”

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policies. 

In the analyst industry, we used have a saying that “when the mainstream press catches on to a trend, it is certainly almost over.” I’d like to think that is the case with the automotive supply chain dilemma, but I’m afraid I would be wrong.

While Supply Excellence has been tracking the ongoing instability and decline of the U.S. automotive supply chain for some time, an article in yesterday’s USA Today predicts that the worst is yet to come. In the piece, my own colleague, Pat Furey, head of Ariba’s automotive sector business, calls the recent rise in bankruptcy filings among automotive suppliers “just the tip of the iceberg. Unfortunately, more will come.”

All the other pundits quoted in the article agreed. In fact, one analyst went so far as to predict that more than half of small- to mid-size automotive suppliers will go out of business within the next five years, either closing their doors or selling to a larger conglomerate.
What’s the problem? Well, the article points to the following pressures as the main culprits for the auto supply chain’s decline:

• Declining vehicle sales. Automakers trying to curtail production, as evidenced by recent production cutbacks at Ford and Chrysler. However, labor contracts have kept automakers from cutting production to required levels. Union agreements also assure workers wages, which keeps automakers from realizing the full potential savings of such cutbacks.
• Price pressure. To make up the difference, automakers continue to demand price concessions from suppliers, many of which are already in financial dire straits.
• Global competition. North American auto suppliers must compete not only with each other but with suppliers in China and India, where labor costs are much lower. And, thanks to recent concessions from the United Autoworkers union (UAW) allowing automakers to bring some parts and assembly manufacturing back in house, auto suppliers must also compete with their customers.
• Commodities inflation. Raw material prices, from oil to metals to plastics, continue to skyrocket. Suppliers must hold down these costs while delivering lower prices to customers.
• Cash flow. As noted here in an earlier post, automotive suppliers are strapped for cash. And credit lines are drying up fast. Auto suppliers are literally dying of thirst for cash.

Fixing the automotive supply chain will take more than just government bankruptcy protection. It will require a complete overhaul of the industry, including ensuring that the entire supply chain — not just the OEMs and Tier One suppliers — engage in more effective strategic sourcing and supplier management strategies, including more effective commodities hedging and a better balance between in-sourcing and outsourcing and on- and offshoring. And, while the Big Three have their own problems to grapple with (the most prominent being non-competitive labor costs), they would be wise to rev up their efforts in supplier development, joint ventures, and co-sourcing or contract sharing arrangements, that allow lower-tier suppliers to purchase materials at the automakers’ preferred contract rates.

But, just in case, let’s hope the pundits are wrong.

While the economy has become the top issue for business and supply management executives alike, there remains some debate on how best to address it. Recent research of over 160 global procurement, finance, and supply chain executives offers some answers.

As its title suggests, the third-annual Spend Management Priorities and Challenges study reveals strategies and approaches supply management executives are taking to address the current economic malaise. According to the study, the Top 10 Spend Management Priorities for 2008 include:

10. Extend spend coverage without adding resources

9. Ensure user adoption of spend management technologies

8. Build internal commitment for spend management programs

7. Recruit, audit, and measure supplier performance

6. Completing projects on time and within budget

5. Supporting multiple business geographies

4. Increase visibility into upcoming spend in the majority of spend categories

3. Identify savings opportunities faster

2. Improve access and analysis of spend data

1. Deliver measurable results that correlate into bottom-line metrics

Surprising? Not really. But the details on how companies are organizing, hiring, and investing to achieve these goals provides a roadmap for what it will take to combat the current economic crisis. I will be examining these strategies and other report findings in the coming weeks. In the interim, download a copy of the complete report here.

With the outcome of what some are calling “the most important U.S. Presidential race ever” still uncertain, many business executives are fretting over the economic, tax, and trade policies of the eventual President No. 44.

Yet, savvy procurement and supply management professionals aren’t waiting for the election outcome. They know that, regardless of who wins the White House, they must devise strategies and tactics to overcome the prevailing issues of the day: global economic malaise, new pressures (and opportunities) of globalization, risk management, and sustainability.

This is the premise behind the upcoming Spend Management Town Hall at Michigan State University (MSU) next Monday night. The first in a series of debates among industry thought leaders and top procurement, supply chain, and finance executives, the MSU Town Hall will showcase how leading companies are applying spend management techniques and approaches to address the leading business and socio-economic issues of the day. Featured panelists at this inaugural debate include:

• Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool
• Alistair Hirst, Vice President of Global Procurement at The Kellogg Company
• Professor Joe Sandor, Hoagland-Metzler Endowed Professor of Supply Management and Supply Chain Management at Michigan State University

I have the enviable honor of moderating this illustrious panel. And, unlike Tim Russert, I plan on pulling no punches. I will get right to the most pressing supply management questions:

• How has the declining U.S. dollar impacted your sourcing and supplier strategies?
• How have rising labor, commodities, and shipping costs caused you to rethink your China sourcing strategy?
• How are you assessing quality, performance, and supply risk in your global supply chain?
• Is the push for environmentally responsible supply a long-term business strategy, or just a passing fad?
• What can procurement do to hold down healthcare and other complex services costs?
• …and more.

I am pleased to extend a special invitation for Supply Excellence readers to attend what I’m certain will shape up as a lively debate. You can register or get more information on the Spend Management Town Hall here.

Can’t attend? Use the comments section of this post to submit a question you’d like me to pose to the panel. I will be sure to report back on the answers and approaches these leading supply management organizations are taking to overcome the challenges of today’s global economy.

The massive run up in commodity prices followed by last week’s sudden sell off has everyone wondering … are commodities the next bubble to burst? In fact, typically cool headed coverage in journals like the Financial Times warned of a looming “big fall” in commodities. But let’s not get too far ahead of ourselves here.

Relatively high prices for commodities - or at the very least oil and the other commodities it impacts - are here to stay for quite some time.

As the US economy stutters and the Fed lowers interest rates to provide a spark, the dollar gets even weaker. And since crude oil is traded as a hedge against the dollar, oil prices will remain high. There’s also quite a bit of evidence that shows the recent run up in oil prices (and even other commodities) is not exclusively linked with demand. So even if China’s consumption slows, that will have less of an impact on crude prices than the pressures from low interest rates and a weak dollar.

And as we know, oil prices have broad reaching impacts on other commodities. Food prices will remain high as long as oil prices are steep. Why (besides the obvious transportation costs)? Biofuels. With crude prices so high, everyone looks to biofuels for a solution, but what happens then? Crops are used to fuel vehicles with ethanol, not feed people and livestock. These demand streams compete for crop space and result in sustained high prices throughout the food chain.

Until these links are broken - which won’t happen anytime soon - the likelihood of a commodity nosedive is very slim. Sure there will be profit taking days, like last Thursday, for traders along the way. But most commodities will likely hit a soft landing later in the year if there is a sustained recession. There are too many interconnected links holding these prices up to have them all come crashing down quickly.

Bob Zieger is a Category Manager for Plastics & Raw Materials in Ariba’s Global Services Organization.

Last week, Industry Week highlighted the fact that 2/3rds of North American organizations have limited knowledge of the operational impacts of REACH (Registration, Evaluation and Authorization of CHemicals). REACH is European Union legislation that aims to put more responsibility on industry to manage the health and environmental risks of industrial chemicals.

I can’t comment on my personal readiness for REACH. But I do know that the 1st decade of the 21st century may be remembered for a tightening regulatory environment that has increased the complexity of doing business for multi-national organizations, creating plenty of SG&A jobs, as well as opportunities for consultants, auditors and quite frankly, spend management software and service providers. Whether you believe these regulations to be altruistic or onerous, one can’t deny that keeping abreast of and compliant with the rules of play in the global economy is a major challenge.

In 2002, the United States responded to the Enron and Worldcom corporate governance scandals by enacting Sarbanes Oxley, which essentially requires companies to demonstrate that they have control over their expenditures, and holds certain corporate officers criminally liable for the accuracy of financial statements. “SOX” quickly spawned numerous copycats including Canada, Japan, France, Italy and others in just about every corner of the globe.

Accompanying SOX was the rise of electronic invoicing, which triggered mixed reactions, ranging from extensive new regulations to complete silence to complex requirements for continued physical storage of paper invoices. In the EU for example, companies must comply with a matrix of not only EU guidelines, but also country-by-country rules that frustrate procurement and finance departments.

A cynical person might suggest that even the current wave of “green” activity, including REACH, is not actually triggered by shared recognition of an impending environmental problem, but by an uneasy convergence of increased demand for “green” products to drive revenue growth, increased cost of waste due to competition for energy and raw materials, and the desire to avoid the expected cost of future regulation. And I should also mention recent food and product safety incidents, which have some calling for the government to protect us from poor sourcing decisions and lax supplier performance management.

The tightening regulatory environment looks like it will continue. Last week’s collapse of Bear Stearns and the Federal Reserve’s intervention seem to have some investment banks even clamoring for increased regulation. Both Democratic presidential candidates seem to be vaguely promising some sort of increased trade regulation (although I’m personally not sure how to reconcile both candidates’ promise to improve the stature of the US in the world while threatening to reduce trade). The bottom line is … spend management, finance and legal organizations, as well as their armies of advisers and consultants will have their hands full determining the impact of integrating their requirements into an increasingly complex global operational environment.

A recent post on Logistics Management’s Loose Change blog tried to make that case that truckload rates will defy prevailing wisdom and actually begin to climb in the coming months. The logic is based on two things: First, that attrition rates of truck fleets would tighten up capacity. Second, that tonnage increases in recent months are indicative of a rebound.

But, I’ve got to take issue with both points.

While fleets thinning the herd of old, worn out equipment without replacing them will lead to some attrition, it’s unlikely to have a noticeable impact on truckload capacity. They would need to sustain that policy for a long time (months or years) before it would really be felt. It’s more likely that this is a short term cost-cutting strategy to keep the carriers’ numbers in the black.

And while tonnage may have been on the rise recently, it is still nowhere near the peak levels of 2005 or early 2006. Until we start climbing back to that level of sustained volume, I’ll interpret a two month bump in tonnage to simply reflect some increase in the transport of heavy loads, rather than an indicator that overall load volume (by weight AND # of shipments) is on the rebound.

So that’s where Dave Schneider and I disagree. But if I read him correctly, he and I would both argue that now is a good time to consider sourcing truckload transport, although for different reasons. He appears to believe now is the time to lock in spend, before prices increase. And I believe now is a good time to evaluate your options since the increase in available capacity leaves some opportunity to cut costs.

Why do I think now is a good time to seek better pricing on truckload & less-than-truckload contracts. Several reasons…

• The market is at its softest point in years and is expected to remain anemic through the summer. Even the rosiest predictions don’t anticipate a dramatic upturn in demand for several months and some believe demand and prices may actually fall further.
• Truckload has taken the biggest loss in business due to the downturn in the economy. Until the economy starts to show signs of recovery, there will be excess capacity available. I’m not going to get into when and how that recovery will come about because frankly, it’s far too early to tell and there are too many moving parts (Federal stimulus package, fuel costs, further Fed rate cuts, etc.). But, it seems pretty unlikely that the rebound is just around the corner.
• Flatbed trucking is now an attractive mode to source due to the downturn in the construction industry. Another year of double digit declines in housing starts is likely, so there should be plenty of capacity for at least the next couple of quarters.
• Unlike previous years when there was more demand than capacity, carriers are actively expressing interest in future bids, indicating they have empty trucks they want to fill. In other words, they are hungry for business and likely ready to wheel and deal (sorry yes, the pun was intended).

Rachel Rutkoski is a Category Manager for Transportation and Logistics in Ariba’s Global Services Organization. Rachel is recognized by the Institute for Supply Management as a Certified Purchasing Manager (C.P.M.) and has several years experience as a supply chain and transportation analyst in Fortune 500 companies.

I’m a consultant and I’m in the same business as a CPO.

Leafing through the archives of CPO Agenda, I came across an executive coaching Q&A, where a CPO asked how to tackle the problem of procurement not being involved with other functions and company decision making. Sound familiar?

Dick Russill’s eloquent and measured response was: sell. Sell to the executives you want to sell on your behalf. Sell to the people whose business processes you need to impact. Sell to people who want to work with you. Sell to people who don’t want to work with you…yet.

Like I said before, we’re in the same business. Just as I have to align my interests with yours so that you can achieve your objectives by working with me, the CPO must align their objectives with the objectives of their company and demonstrate a compelling vision of how their business processes drive that value in the organization. Just as I must understand the objectives of the organization our team serves, the CPO must understand the objectives of finance, marketing, legal and human resources to be able to articulate how the procurement process delivers shared value for all.

Again I say, you and I are the same. We are the same because in order to articulate how my tools and methodologies align to your objectives, I need a keen understanding of them and confidence in my ability to execute. In order for a CPO to articulate the value of the processes they bring to the enterprise, they have to understand the processes and the value that those processes bring to the organization.

Sometimes it is too easy to not take the time to understand; too easy to confuse being able to save money and knowing something about a category with understanding what the owners of those categories are really trying to achieve; too easy to confuse a largely rhetorical X-phase process with really understanding how our organizations execute; too easy to find ourselves praying for the day when the savior “mandate” will come from above and make the need to work with us self evident; and too easy to be content with the mediocre results you achieve while you wait for that day to come.

Right now, there is a lot of uncertainty in the market. The calm seas of low raw material prices, a strong dollar, and easy access to capital have been replaced with a stormy maelstrom. CPOs have the chance to be the Captains who can help companies navigate these seas by understanding their destination and getting their crews in tip top condition, by sharpening their processes and truly understanding the value they provide, and delivering that value each and every day.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policies.

Last week, Supply Excellence contributor Kris Colby reported from the Sourcing Interests Group’s regional conference that sustainable supply strategies are not just a passing fad. After rubbing elbows with sourcing and supply management executives from some of the world’s largest manufacturing and retail companies, Kris came away with this conclusion: “world class sourcing organizations are devoting significant attention to plotting a strategy that balances both the economic needs of the company and the green demands of their leadership, employees, shareholders and customers.”

Yet, while companies may have come around to the idea that environmentally responsible supply strategies can be good for both the environment and good for business, many still struggle with how to get started down the path to sustainability. Aberdeen Group’s latest CPO Agenda study offers some valuable guidance on this issue. (Download a complimentary copy of this report here.)

In the report, Aberdeen profiles how one mid-market materials manufacturer launched and grew its sustainable procurement program. Like many companies, the mid-market manufacturer began its sustainability program with a focus on internal operations, recycling items like paper, ink, toner cartridges, and waste oil. The company used this experience to develop a methodology for calculating the impact and return of sustainable initiatives to total costs.

Aberdeen says the manufacturer now includes a “standard set of questions for suppliers in the RFI/RFP stage” — especially for its core spending categories like metals, paints, chemicals, and energy.

The company’s global supply chain director gives the following advice for other companies considering hopping the green supply bandwagon:

1. Attach every dollar sign to every initiative to let people know about the savings involved.
2. Remember to calculate and communicate the lower procurement costs as well as the avoided disposal costs.
3. Communicate with suppliers to get insights into where opportunities exist to cut costs.
4. Track savings for your firm and for your suppliers.
5. Deeply analyze the entire product lifecycle and associate supply chain.

Sage advice for starting a sustainability program at companies of any size.

In a special section of the Wall Street Journal (registration required) earlier this week, a duo of supply chain management professors warned that changing global market dynamics require new supply management skills and approaches that most companies lack.

Such findings are not news to the Supply Excellence audience. (Indeed, most of you are feeling the pinch of the talent crunch first hand.) Yet, the article does provide some strong facts that can help you build a business case for recruitment and training budget and resources. The scholars also offer recommendations for solving your skills dilemma in the near-term: staff augmentation.

The professors from the business and management schools of Florida State and North Carolina State University note that managing the supply chain in the face of globalization, offshoring, and an ailing economy “requires a broad skill set that many managers simply don’t have right now.” (This prognosis was echoed in the recent Aberdeen Group CPO Agenda study, in which 74% of senior supply management executives said they “need people with different job skills” on their teams. Download a complimentary copy of the report here.)

Specifically, the scholars’ joint study of supply chain managers found that the following skills or approaches are required to effectively manage supply in today’s global economy:

• “Big Picture View” — with an emphasis on strategic cost reduction and a greater focus on total cost in supplier selection.
• Building teams — particularly strategic relationship management with internal and external “customers” and partners.
• Managing technology — especially electronic procurement and reverse auctions.
• Finding suppliers globally — especially managing complex outsourcing agreements and developing sound global sourcing strategies. The study found that companies had particular challenges in understanding “the nuances of vital [supply] markets around the world.”

In light of the current economic pressures and the need to expand and compete globally, the professors recommended “If [a company’s supply management team] can’t do it all themselves, they must hire people who can do the job for them,” including the use of the “number of consulting companies that have sprung up to supply this global market intelligence.”

This advice echoes the strategy I have heard recently from several CPOs. Consider these comments from the head of global procurement at one of the world’s largest beverage companies: “Grain and commodity prices are killing us right now. We need to rapidly expand our global sourcing efforts and reach new markets across all categories in order to meet our cost savings targets for the year. I can’t train or hire people fast enough to manage this internally. Instead, we are looking to [outside] experts to help meet our sourcing and savings goals.” (more…)