CATEGORY MANAGEMENT
Refreshing a core process
Jon Hughes and John Dickson
Category management is the cornerstone of procurement excellence but all too often is driven by narrow functional perspectives rather than by the business drivers that really matter, argue Jon Hughes of Future Purchasing and John Dickson, CPO of Diageo.
They initially explore how category management processes are typically set up and highlight the design challenges. They then use the case of Diageo as an example of how to redefine category management to enhance its relevance, appeal and usage.
The project, started in 2007, established four themes that need to be in place for category management to work effectively, including knowledge-sharing across the organisation. It led to the creation of “The Loop”, an intranet-enabled tool that can be accessed by procurement staff worldwide.
Importantly, sourcing and supplier management are separate, but equally weighted, processes and there are flexible routes into each one.
The lessons learned by Diageo in implementing the model and ensuring a close fit with company culture are outlined. Early results are impressive, with category managers saying they feel better connected and the reputation of procurement as a driver of value enhanced.
RISK MANAGEMENT
Doing more with less
Nick Martindale
The economic downturn means CPOs are being asked to do more with less. CPO Agenda spoke to a range of practitioners, consultants and vendors about how to cope with the challenge. Eight key options emerged:
1. Prioritise workloads: ensure an optimal allocation of work across your team.
2. Improve staff productivity: eliminate redundant activities, seek synergies and automate manual processes.
3. Scale back strategic initiatives: one CPO says he has been forced to cut back on supplier relationship management activities, for example.
4. Squeeze more out of technology: make better use of existing systems or cheaper, on-demand solutions.
5. Tackle maverick buying: take advantage of the added focus on cost to enforce rigorous spend policies.
6. Reassess spend priorities: focus attention on categories that will have the most impact.
7. Use external expertise wisely: specialist firms can complement your resources.
8. Outsource non-critical activities: look at handing indirect spend, in particular, to third-party providers.
One CPO, though, believes such projects should already have been done. “The last three years was the time to get your house in order,” he says. “Now it’s harvesting time.”
ECONOMIC DOWNTURN
A fine balancing act
Nicolas Reinecke, Nicklas Garemo and Guido Baier
The economic downturn is putting CPOs under two potentially conflicting pressures: improving a firm’s cash position while protecting against the risk of supplier default. On the former, CPOs have a range of levers at their disposal, argue the authors from McKinsey. These are cost focus; demand management; capital expenditure control; inventory management; cash from assets; and cash from the supply chain. But most companies fail to apply these properly.
CPOs must also cope with the growing risk of supplier failure and learn to spot the telltale signs, including senior management changes, redundancies, requests for price increases or improved payment terms, or a declining customer base. They should also put in place contingency plans to deal with failures they cannot be expected to foresee, such as holding extra stock.
Response strategies when critical suppliers hit trouble can include paying them earlier, buying goods on their behalf or making loans available on flexible terms.
However, the downturn also provides opportunities for cash-rich firms to acquire strategic assets that give them access to scarce materials, capture more of the value chain or deny competitors supply sources and partners.
INTERVIEW: GEORGE IRION
Part of the fabric
Geraint John
Based in Greensboro, North Carolina, VF is an apparel manufacturer and owner of brands such as Wrangler, Lee and The North Face. Its vice-president of procurement, George Irion, is responsible for direct materials for jeanswear and imagewear, heading a team of 40 people and managing a spend of $1 billion a year. The company makes around 45 per cent of its garments, with the rest sourced through a dedicated Asian operation.
In this interview, Irion says the biggest challenge on the direct side is the shrinking supply base. “Market forces worked in our favour for a long time and now they don’t,” he says. Establishing closer, more transparent relationships with key suppliers is a strategic imperative.
One initiative has been to support probably the only denim mill to open in the US this decade, which is 100 per cent dedicated to VF. The company is currently looking at extending this model to another mill that would involve an even closer relationship. In the longer term, Irion wants to extend this strategic view of fabric sourcing to Asia.
In 2009, though, a big priority for procurement is contributing its share of $100 million in cost savings, particularly through better buying in its retail business.
SUPPLIER EVALUATION
The £4.4bn assessment centre
John Doyle and Richard Jones
Assessing a potential long-term partner’s ‘soft’ skills and cultural fit is notoriously difficult. This case study article explains how the Nuclear Decommissioning Authority (NDA) – a UK public body – used an assessment centre approach when awarding a recent £22 billion contract to clean up the Sellafield nuclear power plant.
The management teams from four multinational bidders were put through two assessment centres: one at board level and one for its “executive secondees”. The focus was on team rather than individual performance, and participants were assessed on competencies such as managing change, values and ethics, innovation, teamworking and problem-solving.
Teams were set tasks based on specific challenges at Sellafield, which they completed in conjunction with NDA executives and other managers. They were scored on both team performance and collaborative working.
As well as identifying developmental recommendations for the winning consortium, the assessment centres also helped to fasttrack the relationship-building process.
The authors argue that a similar approach could be used for other major partnership contracts, whether in the public or private sectors.
RISK MANAGEMENT
An upside to the downturn
Stephen Finch, Ashley Hubka and Grégory Kochersperger
CPOs are under more pressure to protect against the risk of supplier failure, commodity fluctuations and reduced quality, but tackling risk management in the right way, say three partners at consultancy Oliver Wyman, can also help build competitive advantage.
Drawing on the findings of a recent research study, the authors explore conventional approaches to risk and innovative alternatives that have paid dividends for the likes of Procter & Gamble, Hewlett-Packard and Chiquita.
They describe a risk management maturity framework, which divides companies into five categories ranging from “unstructured” to “value-added” and explain the differences between the various stages in strategy, processes, organisation, resources and systems.
To be able to fully protect against the downside of risk, firms need to achieve at least a level 3 performance in each category. This will involve prioritising the most important risks, creating response strategies, developing a real-time monitoring system and building the necessary organisational structure, including highly informative KPIs.
Once those elements are in place, CPOs can turn their attention to the upside of risk by assessing its impact on revenue growth and innovation
RISK MANAGEMENT
Casting the net wider
Dick Russill and Nick Wildgoose
In a recession, there is a tendency for CPOs to concentrate their risk focus on external events at the expense of internal behaviours and procedures, say business coach Dick Russill and Nick Wildgoose, supply chain product manager at Zurich Insurance.
Yet three of the five core risk landscapes with which organisations must be concerned are internal:
• procurement processes to maximise procurement opportunities and contract negotiations;
• management controls to guide people’s behaviour;
• the ability to cope with unexpected events.
Organisations should conduct a shared risk analysis in the business and plot the results in the five landscapes using the “risk catcher”. This tool highlights the levels of preparedness across the business, brings risk specialists out of their operational silos and alerts non-procurement people to supply-side risks and opportunities.
The article proceeds to highlight cases where defective procurement processes and management controls have adversely affected a company’s ability to deal with risk, before illustrating how effective procurement risk management has prevented unexpected events from harming the business.
