Participants
TORBJÖRN BÄCK is managing director for the Nordic countries of BrainNet, a supply chain management consultancy
STEVE BAGSHAW is editor of CPO Agenda and chaired the discussion
GUY BRUCE is the former commercial and business transformation director at Homeserve, an insurance and support services company. He is currently an interim director for Turner & Townsend, a management consultancy
PER HILL had been CPO at Lantmännen, a Swedish group of companies in food, energy and agriculture, for two days at the time of the roundtable. He was previously vice-president at construction group Skanska
TOMMY KARLSSON is vice-president of purchasing at Alfa Laval, a Swedish engineering company
BOB KICKHAM is senior vice-president of sourcing at Luvata, a private-equity owned copper producer
JONATHAN WATT is the former CPO and senior vice-president supply chain at Vestas, a Danish maker of wind turbines
Steve Bagshaw (SB): The subject of today is balancing quick wins with tomorrow’s sustainability. To start, I want to ask what is top of your quick win list for the organisation? Per, I know that you started your new job yesterday, but perhaps you could start us off.
Per Hill (PH): Yes, I am only in my second day [as CPO at Lantmännen]. What I can see immediately is that there is a strong focus on cash.
Jonathan Watt (JW): I’ve just spent 14 months in Denmark at Vestas, which is going through tremendous growth and change. We spent the past year restructuring the function – people, processes and ultimately performance. The quick wins we found were in quality, delivery and cost. What is important is to follow the compliance of the suppliers on the key contracts. By the 80:20 rule, if you look at the very large contracts and you pick your way through them, you will find you will often find significant hidden value in those supplier relationships.
Torbjörn Bäck (TB): Today we are very much focused on cost cutting and cost rationalisation. Another large part of BrainNet’s work is training. We see in many projects why you have problems finding the right suppliers or working in the right way; it is a lack of competence in procurement departments and then the organisation as a whole.
Bob Kickham (BK): Our biggest risk is making sure that we are healthy going through the recession and that we are managing for cash. At the same time, we are putting in very strong structures so that we have leading indicators that enable us to say what we will do if we lose 5 per cent, what will we do if we lose 10 per cent and we add scenarios below that. When those leading indicators kick in, you have the plans in place with your supply base to automatically move into those scenarios.
SB: Is there a theme that connects the quick wins in the organisations you’ve worked for?
Guy Bruce (GB): Typically an event has created an immediacy in the business for wanting these quick wins, often at all costs – particularly in listed businesses. Hit the supply base for 5 or 10 per cent, whatever number someone has plucked out of the air. The problem is the suppliers are not going to be there in 12 or 24 months, either because they choose to do business with somebody else or they go out of business, or you experience supply issues that cost you more than you think you have saved. The key is having the framework to understand those trade-offs and be prepared to communicate that message back, and while that is not always an easy conversation it’s critical that we have the open dialogue.
Tommy Karlsson (TK): What is happening now is another reason for doing something we have done a number of times. What I have learnt is not to focus too much on sustainability, because then you get lost in it and you don’t get any quick wins. In the long term, cost, quality and deliveries are of the same importance, but you always have to give priority to the cost parameter in the short-term horizon.
SB: How long is the short horizon?
TK: It depends which commodity you are dealing with and what the alternatives are. We always have to analyse the balance of power and that differs a lot if you buy titanium or if you buy a very basic casting. The danger is to have one definition and say, this is the way. You have to do it differently, depending on what commodities; we have divided our total spending into six major commodity groups.
JW: When you look at a portfolio of savings opportunities, you immediately segment them into ease of implementation and size of opportunity. Ease of implementation translates into can this be done in less than six months or less than a year. Without doing that, quick wins could rapidly become a black hole.
BK: You need to focus on the things that will make a difference, which are the things that you are going to rest your reputation on. They are about 20 per cent that make up 80 per cent of your spend. Otherwise you fight battles over pens and things, which is just nuts. In my last job, the biggest problem I ever had was we foolishly tried to buy taxi services and got into all sorts of debates about cars and in the end it wasn’t worth a jot. It went on forever and it was a nightmare.
JW: Similarly, you could end up chasing some savings that are difficult, not in terms of the implementation time, but in terms of the range. Individually, they are easy to implement, but to get the size of the savings you need to cover a thousand line items.
GB: If there are a thousand line items and you don’t have the traceability to find it in the profit and loss, once you have saved the money then it can be untraceable.
SB: How would you turn those into real savings?
GB: In the past, we have built a model where savings activity is tracked by line item, implementation date, cost saving or cost avoidance. The system is set up to measure it almost before or in parallel with defining or driving transformation or step change activity, because experience tells you that in six months you are going to have a conversation about savings.
TK: What we have done is to have an enlarged note space, a global system, where we track each saving opportunity – whether it is big or small, it is traced. There is a short explanation, you have an owner of it, you know what unit is going to use it, you have a timeline and you have quantified it. Then you make an agreement before you start between the people who identified it and the people who are going to use it. In the end, you also make sure that the one who is going to use it sees the effect of it in their local objectives. Then in the office you have the controllers who check that what is in the central global system is also showing up in the profit and loss reporting. You need to combine it in one system.
JW: The third point would be to make the connection with the profit and loss and get the finance department to reconcile the savings and take ownership.
GB: I never produce a savings number. I always have finance do it based on an agreed model and then ask audit to review and sign off quarterly. When I get to the end of every quarter, there is no debate because finance reports to the CFO and audit reports to the chairman. Any issues have been identified and addressed early to create a consensus on the numbers. This is how credibility is established and maintained, it’s about transparency and interdependency.
PH: Another challenge in some businesses, especially more project-based businesses such as construction, is that you calculate your sales price in a cost-plus model, where savings you announce are reflected directly in the price to the customer. The saving goes not to your profit and loss but to the customer. In some cases, that may make sense because it may increase your top line. But you should be aware of what you are doing with your savings: do you want to use them to increase your sales, or if it is to go into your P&L.
GB: That ties in with what happened at Homeserve, which was one of the UK’s biggest marketers when I was there. Two things happened: one, the climate began to tighten, so marketing was told: “You have to get five per cent customer growth, but you are not getting a penny extra to do it.” So they started to scratch their heads and think “How do I do that?” The second thing was a change to the procurement organisation, the introduction of different skills and capabilities, we presented marketers with people who can talk in their language and deliver something tangible and valuable. Through working with procurement, they quickly worked out through some easy wins, the costs of designing and sending direct mail to Mr and Mrs x could be reduced, less cost per unit gives allows more marketing for the same cost. The question then is, are they allowed to reinvest the money, and that is a CFO and CEO conversation. In our business they were allowed to, but the benefit has to be produced first.
SB: Could marketing itself be described as an area for quick wins?
GB: It is often one of the last bastions of indirect spend so there tends to be a lot of fat. In itself that could cause an issue, because if you find too much, too quickly, people get nervous because there is an assumption that things haven’t been run properly before and that reflects negatively on the marketing department. We used to present the information and manage the improvement within the function – a do it with you, not to you approach. This helped to maintain and build the relationships rather than destroy it.
SB: The focus so far has been on cash savings, but what about the supply base? Do you have the luxury of worrying about the future of your supply base?
TK: It depends what kind of product or commodity you are talking about. If you invest a lot in knowledge, a lot of tools, patents with the supplier, it is one story, if you bundle it by a standard bolt, it is another.
JW: You start looking at, say, 50 critical suppliers, then you work out which of the suppliers are strong and which are weak. For the strong suppliers, it is your commercial responsibility to make sure that they follow the market with you in terms of the cost pressure that you are suffering. The weak suppliers, if they contribute to this approach, they could fail, so you say: “We will deal with you later, we will watch you very carefully, we might even give you special payment terms, but we won’t hammer on the price, otherwise we will have another set of problems and we will be taking over your business in order to keep the parts coming.”
TK: You need to have a closer and frequent dialogue with the suppliers, so you are not hit by a surprise; you have to keep a close eye on what is happening.
JW: The best bet is to phone up, not the sales guy, but the CEO or the CFO. You get on the phone and say, “How’s business? What is it looking like? How are things?” and you have a meaningful conversation. Not in a threatening way, in terms of “are you likely to stop our deliveries?”, but “do you have any issues with cash where we may need to sit down and see where we may be able to help?” If they say, “yes”, then you know.
SB: What else can you do? After all, you can’t phone up all your suppliers every week and speak to the CFO.
TK: You could easily phone the more important ones. You don’t need to analyse it too long to know which ones they are.
JW: You could phone up to 20. As a CPO, you take the top five or six and then you delegate down a few to some very senior people in your team. You get warnings as well. For example, if you get suppliers phoning up saying “Don’t miss this payment date”, you think, hello, what’s wrong.
SB: Will they try and dress that up for some other reason or would they simply say: “We are struggling, please don’t miss it”?
GB: It tends to be positioned in the third person – “I have been asked to call you – we are having problems getting paid from our big customers” or “our suppliers are squeezing us and we want to help them, so you help us”.
SB: Would that be when they are in the death throes or a few months before?
GB: All of the above would be the answer. At the moment, people are using it as good business practice. Because buyers are expecting to have to pay on time, because they know the market is tightening, some companies who don’t need it have CFOs who say: “We are going to operate how we should operate anyway, but haven’t, so we won’t pay it on time.” Some operationally active CFOs will, as a matter of good practice, see the cash flow impact that late payments could have or are having on their business and try to push this risk down the supply chain to maintain their own cash flow ratios, it’s a supply chain liquidity issue.
SB: I’d like to move on now. If, for a day, the CPO became the CEO and whatever you decided was going to happen with the company happened, what would you do?
GB: To be honest, I would try and take my CPO hat off because that is where procurement sometimes is a little bit introverted. We often say we should be strategic, we should have a seat at the boardroom table – well, why should we? I would try to put a CEO’s hat on with a slant towards procurement outsourcing. The idea of being a CEO is you have to have a much broader spread of skills and understanding of the business needs.
BK: If you mean how far has the procurement agenda advanced in business, it has been embraced completely. The average manufacturing company spends 70-80 per cent of its turnover on suppliers and most CEOs grasp that. One of the things that we could all do with, however, is managers teamworking so there is no procurement or sales agenda, whatever. If we can get that working better and more cohesively, that is the issue that will differentiate those companies that do this thing really well from those companies that do stuff averagely well.
JW: What you often find, then, when you look with a CEO hat on, is consider whether my team is working on the critical issues, is it engaged and is it aligned. If you look at the targets that procurement is often given and then you look at the targets from the manufacturing side, there can be conflict in many areas. This lack of alignment can cause huge waste in an organisation and what I would do is a strategy deployment process – the Japanese call it hoshin – where you start with the key business goal, and then you have a structured process with your key functional heads that develop the functional goals, ensure alignment and agree resources and responsibilities and then stick to it. In companies such as Toyota, this process drills down until all employees understand their objectives including the what, how and when.
SB: Do you have a problem with maverick spend?
BK: I think it is our lack of leadership and our lack of communication of the benefits that is the issue, not that an engineer wants to go off and pick up the phone and order something. We should take a big responsibility in those areas, making it easy for those folks to just get on with their business.
GB: You used a key word there: business. At the end of the day, procurement, like everyone else, just facilitates good business and smart operation of a business. The person going off and doing something off contract, for want of a better expression, is unlikely to doing it through sheer bloody mindedness. There is usually an underlying driver to it.
SB: This is a longer-term issue than quick wins, but what is the answer to the leadership problem?
BK: People rarely do that because they just want to go off and waste their time buying things. They do it because they have a problem that can’t be solved within their context as they see it. It is getting out there, explaining that there are people that can help, getting phone numbers out there and getting a behaviour and a mindset that says “yes, let’s work it out”.
JW: We seem to be talking about building processes jointly with the engineering department, for example. Sitting down and saying “How can we build a process that is a standard process where we can be more efficient collectively?”
TB: This means raising the role or the performance of the purchasing department. By showing how it should be done by procurement and giving people the knowledge and tools and awareness about all the questions that are important for the business, procurement can achieve it. But if they take a standpoint that suppliers are not allowed to speak to different people in the organisation, then it is difficult to build a leadership role or engagement.
PH: At AstraZeneca, where I was head of procurement in Sweden, it was a very diverse procurement department. In some cases, it wasn’t even headlined ‘procurement’, it was ‘business development’, but the professional work being done there was to a large extent the same as strategic, professional category managers do.
BK: If you have a category strategy on a couple of pieces of paper, and the front sheet has the signature from the top person in engineering, the commodity or category expert, technical and the same from the purchasing side, you have something of a common vision. You can fit the strategy on one page easily, even for a billion-dollar spend. Where do we want to be? Where are we now? What are our circumstances and what are the steps to do it on?
JW: I have rarely worked in a company that initially has category strategies. People say they have them, but they are floating around in their head. Unless they are written down, agreed and communicated, they are not category strategies – they are only hot air.
SB: How much of a quick win could indirect purchasing be? Is it something you would consider?
GB: If we take the definition as non-core, then it’s very easy to cut costs regardless of the business’s maturity levels. The discipline must be to avoid outsourcing a problem, or ultimately you’ll end up paying more than you originally planned. The outsourcers aren’t friends, they are not in business to build a win-win outcome with you, they are there to make margin for their shareholders, and people sometimes get lost in the details and forget that.
JW: If you are outsourcing logistics and you are working with people like DHL, you can do it fairly quickly: they are extremely experienced at taking on packages like that. Structure it correctly and then outsource it for the reason of taking fixed cost out of your business, improving the service and make sure the contract that you have with the outsourcer reflects that.
BK: You need a deal that allows you that flexibility, because often the first thing that the outsourcing deal does is constrain that.
TB: Especially if the outsourcing includes a whole department or business area supporting the rest. If you have a mess you will still have a mess, but with a different contract afterwards.
GB: If you get involved, overlay that with systems. To use your example: there you go, you’ve done the deal, take the warehousing, take the staff. Clearly the warehousing doesn’t move, so that is okay. As part of the services sold by the outsourcer, they put in free systems to improve efficiency, they retrain your teams. Three years down the line, you say: “I want to move now”. Well, you can’t, because all the systems are DHL, all of the teams are trained on DHL systems over which you have no IP and you now have a post-contractual lock-in issue, which no one planned when they signed the contract but now inhibits your choice.
JW: You might outsource to get a skill benefit. For example, you look at the engineering and technical skills in India – they are phenomenal. You could outsource part of your engineering department to India for software or design. You may be a bit more comfortable with intellectual property rights in India than perhaps you are in China, but you still need to make sure that it is protected.
BK: I know we are getting things made there, but we are still designing them ourselves. There is something about being still an intelligent client – you need to retain the capability and capacity to in-source or move somewhere else. That is fundamental in outsourcing; it always remains your issue, it is just how you manage it.
SB: How many quick wins can be achieved through greater use of technology? Some years ago it was going to be the answer to everything and then it went away a little bit. It seems now there is another opportunity for technology to be used in the downturn.
TK: If you see technology as an enabler and supporting for purchasing, I believe that the quickest wins you will have are in the e-sourcing space, rather than the purchase-and-pay part.
PH: You can get very quick hits by getting efficient tools for your procurement people in category management and sourcing. But you shouldn’t necessarily invest in your own technology platform – you can get that externally. If you have a sourcing event that you want to run you can be up and running using good tools.
GB: In the quick win frame of zero-to-six months, if you want to turn around a business you could quite easily address several major categories with a reverse auction, say. If the tools are available, the environment suits and the supply market is highly contested, then you could definitely do it within six months or less.
TB: With e-auctions, for example, there are absolutely quick wins if you are in the right industry and you have those categories. You can also have very simple tools that are not technology but, for example, a collection of good contracts that you can apply to a group of companies. You can have it in a binder and you will have the same function as a portal.
SB: Aside from technology, do you think that the emphasis is too much on quick wins rather than on sustainable, long-term results?
TK: It is a matter of combining both of them. You cannot have the luxury of saying “I only focus on that” – you always have to combine it. You need the quick wins, but you also need the sustainability over time.
BK: It is also how intrusive the change is. What we are really saying is that negotiation and sourcing are things you do to other people. The technical changes, you do that to yourself, so you have to change yourself. For suppliers, there’s an obvious argument for change: here is a value stream, here is a sale, here is a bunch of things to do to get the sale. Persuading your own colleagues on the board that this is a fantastic thing that we turn ourselves inside out to do is a bit harder, the case for doing that is a bit less obvious. That is why it takes longer to do some of those major technical things.
SB: To finish, if you had to give one piece of advice to other readers of CPO Agenda about balancing quick wins with sustainable procurement or how to achieve some quick wins, what would it be?
PH: Never look at the short-term benefit only. Something you always need to keep in mind is that very soon conditions will have changed completely.
JW: Segment the strong suppliers that can afford to give you margin to support your business in times of difficulty, from the weak suppliers that would go under if you did the same to them.
TB: Focus on those aspects that will bring long-term value to your customers but also look for quick win in all areas.
BK: It is about ruthlessly focusing on those things that are going to make a difference to you and to your supply base and do them with good grace, if you can. Be clear about those that are important and make a difference to them. Don’t worry too much about taxis!
GB: Understand what your business values, ensure that through your short-term strategies you deliver that transparently, and if they don’t value sustainability, ensure that all those things needed for a sustainable, secure supply base are in place anyway.
TK: Define the long-term risk areas and to decide how to treat them over time. When you have done that, focus on the short-term benefits to make sure you can get whatever you can and then you combine them.
