REPUTATION
When the CPO gets a request for a quote
Rima Evans
When Toyota announced the recall of more than 8.5 million vehicles, the damage to the company’s brand was as rapid as it was deep.
The events underline that no company is infallible and hard-fought reputations can be seriously sullied in the media frenzy that follows
corporate problems, writes Rima Evans, projects editor of CPO Agenda.
The key is to minimise the risk of reputational damage. This means recognising reputation management as a discipline and putting in place thorough risk assessments and audits.
Michael Levin, a vice-president at Integrity Interactive, a consultancy that works with companies to establish best practice compliance and ethics in supply chains, advocates a six-point approach to minimise risk in the supply chain.
The CPO should be involved in drawing up a communications plan for a crisis, advises Rod Clayton, head of issues and crisis at Weber Shandwick, who worked with Mattel on a recall of Chinese-made toys.
If a company’s supply chain is in the headlines, he recommends: consulting the plan and the communications team; arming yourself with the relevant facts; no public statements without being briefed; assess the situation for what it is; and act to address the issue.
INTERVIEW
Nick Martindale
Global fast-moving consumer goods manufacturer Unilever established its global procurement team just two years ago.
The company set up the function following an external study that said a global operation would offer “significant value”, says Marc Engel, who was appointed the first CPO in May 2008.
It sought to cut costs and focus more on cash by taking a global view of commodities to use its scale for its key chemicals, food ingredients and packaging; and increasing the time it took to pay suppliers. It made an advance of 10 days in trade payables last year, he says.
Unilever is a big user of supply chain finance, Engel says, because it enables the company to extend payment terms without affecting suppliers’ balance sheets. “We’ve had fewer than five suppliers getting into trouble so we’ve had good monitoring and response schemes in place throughout this [economic] crisis.”
The main challenges for procurement in future are business engagement; using analytics; and the need to use longer-term horizons than the next quarter when planning strategy.
CPOs need a broad-based career to do their job well, argues Engel, who has also run the company’s Latin American ice cream business: “I’ve not done a lot of buying in my previous career.”
STRATEGY
John Henke
Much will be written about Toyota’s fall from grace in the next few years, predicts John Henke, president of US consultancy Planning Perspective. There are already clues about how procurement can help the company to recover in the 14 principles of The Toyota Way.
First, although sourcing standardised parts to cut costs “is a necessary and appropriate action”, it may be prudent to pay a higher price for the part from an experienced supplier that has the capability to react in unforeseen circumstances.
Second, once a supplier has been chosen, procurement can ensure the delivered parts meet expected standards and monitor performance “in the field”. In the event of a problem, procurement should provide detailed information that enables the supplier to fix it.
Third, Toyota should work with a supplier to fix problems rather than naming it in public, as the firm did with the supplier of the accelerator part that was presumed to be at fault. This is contrary to building strong supplier relations.
Fourth, he says procurement must take the lead in developing and maintaining these relations.
“Perhaps it is time to add one more principle to The Toyota Way,” Henke writes. “Principle 15: don’t forget the other principles.”
EXECUTIVE DEBATE
London
A panel of senior procurement figures gathered in London to discuss the balance between cost, quality and flexibility in the supply chain, in the latest CPO Agenda executive debate.
If you don’t figure out what flexibility you need and how to get it, your organisation will run into problems, says Michael Walsh, head of value chain at Home Retail Group. Promotions and even the weather drive huge volatility into his company’s supply base.
Colin Davis, director of supply chain at listed utilities firm United Utilities, says early alignment with business objectives and clarity on behaviour and competency goals mean “you naturally work in a more flexible way to achieve the outcomes”.
In some cases, companies absorb higher supply chain costs to meet changes in demand. Participants identified retail as a prime example.
Organisations should regularly check the ability of the supply base to respond to changing demand – “every six or 12 months”.
One way to obtain flexibility from suppliers is to introduce them to your customers and come up with answers themselves, says Austen Bushrod, director of purchasing at gaming operator Rank Group. “As soon as they buy into solutions, you get some level of flexibility for free.”
REGULATION
Richard Brass
Although regulations are a feature of the procurement process, attempts to intervene in the sensitive and nebulous supplier relationships that follow awards are much rarer.
This makes the UK’s introduction of the Groceries Supply Code of Practice, which is designed to protect suppliers from alleged abuses of power by large retailers, unusual.
An indication of the code’s potential impact could be the improvement in supplier relations between Network Rail, which operates the UK’s rail infrastructure, and its contractors after it was fined in 2008.
“It focused Network Rail’s attention,” says Graham Coombs of the Rail Industry Association, which represents suppliers. He says partnership increased and Network Rail adopted a supply chain code developed by the association, “basically about mutual respect and communications”.
Public procurement regulations do not preclude lengthy supplier relations, says Leah Fry, supplier development manager at utility company National Grid.
However, there are limits to regulation: in the public sector, mandatory renegotiations can be a barrier to joint process improvements, whereas in financial services, compliance costs have forced some high quality but smaller suppliers out of the market.
STRATEGY
Andrew Loken and Guy Strafford
Companies with multinational operations that want to tackle indirect procurement face the twin barriers of a fragmented spending base and a fragmented supply base.
But a survey of 250 senior buyers shows how they can make progress in an environment where they face three challenges: greater central management of back-office functions; a trend, driven by economics in directs procurement, to base procurement in locations where the company has no significant operational presence; and increasing moves to base procurement in tax-efficient locations away from budget holders.
Andrew Loken, managing director, mainland Europe, for procurement consultancy buyingTeam, and Guy Strafford, client director, warn that the breadth of categories and stakeholders, combined with the “credibility gap” on the ground of a project driven from headquarters, can doom attempts to get maximum value on indirects spending.
A successful plan will: be based in fact; offer spend clarity and benchmarks; be written plainly, not in procurement jargon; be carried out by local staff; use outside experts to accelerate progress; apply lessons learnt elsewhere; make quick wins to win support; use tools to maintain control; and open new spend areas.
DEMAND MANAGEMENT
Frank Omare
The economic crisis has increased the familiarity of traditional methods of controlling costs, such as changing approval thresholds or driving compliance with purchase-to-pay systems.
Frank Omare, director, supply chain & operations in Ernst & Young’s advisory practice, says the lifting of the downturn has brought about an important change: “CPOs are embracing the concept of spend re-engineering.”
The strategy could seem counter-intuitive, given that procurement objectives are often based on volume of spend, but some consumer goods companies have succeeded in applying it to indirects and are extending it to directs.
CPOs should aim to “right size” key services against expected demand. A combination of demand management and process improvements can save 30 per cent.
Demand management promotes a common agenda between the CPO and the CFO in developing a deeper understanding of the business’s cost drivers. Organisations also need to measure the cost of internal services to highlight savings opportunities.
“For CPOs who have exhausted sourcing, category management and compliance savings, demand management can prove effective,” he says.
DEVELOPMENT
Stephen Wills
Your leadership style defines everything you do, says Stephen Wills, director of group procurement at financial services company Axa.
So what do you need to do if you rise to become the most senior purchaser? Wills breaks his advice into two lists.
His “dos” include:
Articulate what success looks like: using a road map will help everyone to understand how the team reaches the destination.
Ensure that procurement’s objectives are fully aligned to the business objectives so the team understand how they make a difference.
Always deliver on promises.
Communicate what procurement is doing. In many businesses, procurement is an unsung hero so publish and market its achievements.
Trust your people. You have to allow them to make mistakes without risking criticism.
The don’ts include:
Overreact. Respond with facts not emotion. This will get your point across.
Spread yourself too thinly. Your key objectives and priorities need full commitment.
Spend time looking over your shoulder to see whether someone wants your job. You need rising talent in your team.
Miss an opportunity to sell procurement to the board, even if you’re there under difficult circumstances.
