Re-posted from Sourcing Innovation
Today’s post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.
Strategic Sourcing is Dead!!! And if it’s not, it should be. In our last post, we talked about one of the major challenges in a transformation journey for Sourcing/Supply Chain organizations — namely, the vowels A, E, I, O, and U (which stood for Adoption, Execution, Implementation, Optimization, and Utilization). In this post we’re going to address the second, equally important, challenge. Strategic Sourcing has not delivered the promised results years ago, and it isn’t delivering the right results today. Why not?
First, some assumptions. We can safely assume that the goal of every transformation is Exceptional Business Results (EBR). Furthermore, based on an analysis of recent market events, which contain a very high rate of bankruptcies and warnings, we will also assume that most supply chain organizations are not achieving Exceptional Business Results. Our own research over the years appears to affirm this assumption. It is safe to say that the vowels are not the only major challenge organizations face today.
Basically, we believe that the Strategic Sourcing process is fundamentally flawed. And while our research has shown that fixing the vowels will drive better performance and results, we will never achieve maximum EBR executing a flawed process. In fact, we go one step further and surmise that the flaws sometimes lead to destruction of overall, or system wide, value (which ultimately drives Exceptional Business Results). At some point in the maturation of every organization, if we are going to maximize Exceptional Business Results, in addition to tackling the vowels, we must address the process itself. We do not expect everyone to agree with us, and we hope that there will be some spirited exchanges to flush out where the problems lie and what can be done. We strongly encourage our colleagues in the professional services community to challenge their thinking, and especially their clients’ thinking, on this topic. We are all responsible for the situation we are now in. It’s up to us to change it!
We started by challenging our own beliefs and modifying our own core processes — and we were surprised by the results. And while it could be the case that our research to-date may not apply to the larger population, we have been testing our “next practices” approach on clients for the past year. This group includes a number of very large and complex multi-national organizations who thought that they were already achieving EBR, and found that when they tried our new approach they were able to achieve EBR that were significantly beyond what they were already seeing with their best practices methodologies. Now, every other organization we have spoken to has jumped on the argument and embraced it almost viscerally. (After all, shouldn’t the goal of every supply chain organization be to achieve EBR for the year that are better than last year?)
Our belief that the core processes need to be transformed to truly achieve EBR is striking a chord. At a recent workshop with a Fortune 25 client, where we had the senior executives from the supply chain organization and their internal customers, the reaction was ecstatic. It literally reminds me of the old days back in the early nineties when we talked about change management as the absolute single most critical issue for supply chain organizations. (How time flies when you’re having fun!) The reaction then felt very much like the reaction now. In addition to the very positive responses we’ve been receiving from industry, we have also found some academic research that supports our argument (including some by Prof. Michael Jensen of the Harvard Business School, but we’ll address that in a later post). We even went back and talked to some of the very early proponents of Strategic Sourcing from A.T. Kearney (whose benchmarking roundtables we participated in), who strongly nodded their heads in support of our argument.
If we go back to the beginning, it started with cost … and to this day, it is still about cost. While we have moved from unit cost to landed cost to total cost of ownership, it’s still cost focused. And while cost cannot be ignored, we firmly believe that a process rooted in cost can never be a strategic process. Cost as a strategy, for the majority of organizations, is not, and has never been, a core strategy. Long term growth has not been achieved from a foundation of cost cutting. Cost cutting is not viewed favorably by the rest of the supply chain, which then explains the absolutely horrendous change management issues that we have all faced. And while we are not trying to add to the discussion generated by recent headlines outlining the major hiccups for some of the world’s largest and most admired corporations (like Toyota, Apple, BP etc.), a significant portion of the conversation around those hiccups has been focused on them squeezing costs out of either the supply chain (the entire system) or just the supply base (and no, they are not the same … I assume we all agree on that). Furthermore, cost reduction is not very high on the goal sheet of any of our major internal stakeholders.
Since the focus on cost ignores almost all of the other elements of the entire system that contribute to EBR, it may actually be sub-optimizing the entire system. While we do recognize that we have moved from the traditional three-bids-and-a-buy to using TCO and risk and supplier management and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards, and benchmarking quartiles, the reality is we are still trying to roll a large boulder up the devil’s staircase with this myopic focus on cost. We can say this with certainty as we have all been there, done that as industry executives and at the Mpower Group and have not seen much in the way of change in the last 15 years. We need to move from cost, which is not a strategy, to value delivery, which is.
When we focus on cost, we lose the argument with the entire supply chain system before we even start the conversation because the system sees the goal of cutting costs as a threat to the rest of the elements that are contributing value towards EBR. Furthermore, in most cases when we’re sourcing, we don’t even know what those elements are! If we don’t know them, we can forget about knowing what their impact is on the EBR.
Let’s use an example to illustrate our point … a simple hamburger. While deploying the current best practices, I am sure that we will all be able to provide the best lead times and quality and cost with the least amount of risk, and so on. But how will we identify the impact of the hamburger on the quality of work life for the corporation and therefore its ability to attract and retain the best talent? And if attracting and retaining the best talent is a competitive advantage, especially if that talent does not end up with the competitor, then how will we ever include that impact on the entire system? Will our current best practices ever uncover that value contributor to EBR? (The cost of acquiring and retaining talent is nothing to be sneezed at either. If you’re snickering right now, think about how an offshore drilling platform feeds their people, or Google’s famous cuisine) Should we be purchasing Kobe beef for the hamburger because the value that the hamburger contributes to the entire system is far greater than the 5% that we might have saved on our TCO models? Capturing this value is what will get us closer to EBR. Our stakeholders know that; the head of HR knows this issue intimately. But wouldn’t you agree that most sourcing strategies around hamburgers would NOT include talent management as one of its major decision variables? Voila … we have met the resistance because our stakeholders know that we are approaching it from a cost management perspective and that we are ignoring their many other performance metrics. Unless we figure out a way to approach the decision starting with their value perspective, we will not succeed and we will continue to roll a large boulder up the devil’s staircase.
Another way to look at this is that unless we start expanding our pool of stakeholders to start considering our stakeholders’ stakeholders’ stakeholders needs, and start with those needs, we will never uncover these value contributors. They are real, they are tangible, they are measurable, they are observable, and, in most cases, they are ignored! Consider Prof. Jensen’s basic argument which states that in trying to maximize things like Balanced Scorecards (TCO, risk etc.), we can destroy value because it leaves managers with no way of making the tradeoffs. Thus, a balanced scorecard is in fact counterproductive as a performance evaluation system, even though the process of creating the scorecard is critical because it helps “managers understand both the company’s strategy and the drivers of value in their business”. While we may not necessarily agree with everything that Prof. Jensen claims, the similarity between our arguments are pretty clear. Approaches like TCO and Balanced Scorecards do end up actually destroying value and leading us away from the EBR they claimed they would deliver.
There are a series of articles coming out from us at The Mpower Group that will continue to lay out the next practices that we have proposed to our clients. We will explore why we think the strategic sourcing process needs to be fundamentally altered. While we do not expect everyone to agree with us (and we are sure that there will be some spirited exchange), as we pointed out, we have been and are talking to a number of very large and complex organizations, as well as some not quite as large, and every organization that we spoke too has literally jumped on the argument and embraced it. In addition, we conducted a fairly comprehensive comparison with the doctor’s favored approach TVM (Total Value Management) and Demand Driven Value Networks proposed by AMR and Gartner. These conceptual frameworks appear to go the furthest in extending current thinking. In our upcoming posts, we will discuss where our approach is very similar to TVM and DDVN but we’ll also point out where our thinkings diverge.
We will tie in the concepts of AEIOU that we discussed in our first post. We will also tie in some very powerful academic research that supports most of what we are saying. There is a significant amount of value in our respective organizations and we suspect most of our organizations are frustrated because they cannot seem to capture this value. It’s time to change the axis, to fundamentally alter the way we make these decisions.
So whether you agree or disagree, please, please, please let us know what you think. This is way too important for a one way dialogue. Call me nuts, call me genius, call me Al, just keep sharing your thoughts with us!
Strategic Sourcing is Dead!!
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Tim -Welcome to the debate old friend (not as in age of course, although we are both getting on)
As most of you who have seen Tim and I share the stage on many occasions (he is the good-looking one AND he is the one with an accent!), you will know that we have always mostly agreed with each other and my response to Tim’s comments will reflect that. Where I will disagree is that most of what Tim suggests is absolutely right in terms of identifying Best Practices but what I think we need is to develop a set of Next Practices. Because of my long personal and professional relationship with Tim (we were actually in a barat in New Delhi!) and the relationship with IACCM and its members (we published one of the earliest Maturity Models that identified Value Creating as the ultimate stage for Sourcing and Supply Chain organizations – 8, yes EIGHT years ago!!), we are going to recommend our 1st Next Practice to this community. We will continue to publish our entire collection of Next Practices over the next few weeks, so please stay tuned, and send us your suggestions or opinions, and help us refine them. We will also be releasing our new Transformation model and we will again let the community help us refine it. We do not have all the answers yet but have enough of the initial models and set of Next Practices and we are implementing them at client organizations. And we are going to let the community help us refine it. Develop Best Practices from these Next Practices if you will. By the way, you can also read Part 2 of the blog post that Tim refers to here News U Can Use next Tuesday.
So let me start my response to Tim and share with you our first Next Practice …
Tim is of course being extremely modest when he graciously calls me a thought leader at the same level as him. While I totally agree with Tim’s call for fundamental change, I am afraid that the bus may have left for that. We have all been calling for this fundamental change for as long as I have been in this profession and I am sad to agree with Tim (somehow that doesn’t sound like what I mean), that the change has just not happened.
“…sometimes lead to destruction of overall, or system wide, value’.”
I think Tim capture’s most of what our core argument is (more on that later). Where we ABSOLUTELY, POSITIVELY, FUNDAMENTALLY AGREE is that what we have been doing has in fact led to destruction of value, most of which has been invisible to the Sourcing organizations but totally real and visible to their 3rd or 4th level stakeholders That is why we have had all these Change Management issues all these years. That is why Best Practices will never ever get us out of this ditch. That is why another clarion call for fundamental change will be another echo in the forest. We must first start by acknowledging that we have in fact been doing it all wrong. Well, mostly all wrong at least.
“Modern business is designed around contention systems.”
I would mostly agree with what Tim has to say above and to maximize results in that type of environment, tools like Balanced Scorecards were developed and clearly, the opinion on their effectiveness has been mixed at best. You can read what Professor Jensen has to say about this or look at the comment below by Dr. Hoag. A perfect analogy in the Sourcing World is TCO (another Best Practice) and I have personally seen senior executives cringe every time that term is brought up.
“……businesses need to change the way they select, form and manage their trading relationships, with suppliers, customers and distribution channels……… Their problem is sometimes the skills and behaviors they bring to their job. …..”
I agree with everything Tim says here. I would add however that another set of relationships that is even more critical than the ones Tim mentions are the internal relationships. The constraint of skills and behaviors is clearly one of the top challenges. We have developed a significant number of Competency Models for Talent Management and in every single case we make sure that in addition to the core process skills, there is even more emphasis placed on Strategic skills (which are often called soft skills at great peril to the organization).
“…..First, I would highlight that the complexity of business in today’s global markets has increased and that this is adding to the risks we face ……Second, I would point out the diversity and volaitility of the markets we serve ….”
This is probably where Tim and I end up going on significantly diverse paths. I do not think these are necessarily the right issues or even the right process to approach identifying these issues. And since identifying the right set of issues is so critical, the process to identify them becomes as critical as well. We will be releasing our solution to this as part of the Next Practices series.
“For those who wish to follow this path, a possible title for the senior management proposal might be ‘Achieving Compliance Through The Elimination Of Bureaucracy: A New Approach To The Management Of Business Risk & Opportunity’”
I will respectfully disagree with Tim on the possible title for this presentation because this puts us right back in the types of roles that we currently have – compliance!!
The first Next Practice, which we would like to release to this community, is that the Sourcing organization MUST be a part of the sales process, including face time with the customer prior to winning the business. After all, I assume that we can all agree that one of the most critical role that the Sourcing organization plays is that it represents what the client’s needs and wants are to our supply base (please, NOT the Supply Chain). How confident are you that your current Sourcing organization accurately and totally reflects what your customer’s needs are to your suppliers?? And if you are doing that without being actively involved in the sales cycle and actually dealing with the customer prior to and after the sales process, I assume you are depending on the kindergarten game of “telephone” where your customer’s sourcing organization has conveyed what they think their customer’s needs are to your sales organization. From there, it is fed into multiple channels (Sales, Finance, Logistics, Engineering, Manufacturing, Quality…well you get the picture? Or maybe you don’t!). Because now your sourcing organization puts all these various elements from all those channels and tries to paint a picture of what your company’s customer thinks they need (remember, that’s another poor old sourcing organization working with the same darn set of issues and they are trying to represent their company’s customer’s needs!!) and represents it to a number of different suppliers. Should I go on or do I have your attention?
On the other side, the Sourcing organization MUST insist that their supplier’s sourcing organization accompany their sales force and be part of the sales process! In addition, what that also means is that if the Transformation is about changing behavior (ummm, otherwise why bother?), then we need to talk about metrics. We cannot measure the Sourcing organization on QDC (Quality, Delivery, and Cost). Their Balanced Scorecard (ugghhh!) must contain a healthy dose of Customer related measures. And by the way, most organizations measure QDC on the inputs to their value conversion process. So if your leadership is measuring you on QDC and putting you through all kinds of training..ummmmmm, well you think about it! Moreover, shouldn’t we be pushing QDC on the input to our supply base? (More on that later). At least if we are going to measure QDC, let’s measure it at the end of our value conversion process, not the beginning?
So whether you agree with us or not, we certainly hope that you will join in on the conversation and help us validate and improve the set of Next Practices that we have developed.
I do not agree with taking radical positions. In the world of social and economic sciences are no absolute truths. To say that strategic sourcing is dead can be applied to a particular situation of companies that have been analyzed, but some companies have achieved significant results when applying strategic sourcing methodologies.
Ever since its inception, the Balanced Scorecard has stressed financial performance over every thing else. In fact, we dedicated an entire chapter to discussing this myth (see Managing Value-Based Organizations: It’s Not What You Think, by Bruce Hoag & Cary L Cooper).
Value can be fully realized only when everyone in a company has a deliberate hand in its creation and exchange; and for this to occur, everything in the organization must be directed deliberately toward that end.
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