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CHAPTER 1
The Next Level — an Overview for the C-Suite and Supply Management Leaders
One of our favorite questions to ask an audience is this: "Please raise your hand if you believe that most senior executives around the world understand the enormous potential of modern supply management." At best, 10% of the audience raises their hands. The follow-up question takes the next logical step: "Keep your hands raised if you believe that those same executives understand how to achieve that enormous potential — how to build the transformation roadmap." Typically, no hands remain raised.
Is this an indictment of most senior executives? Or is it an indictment of supply management leadership for failing to create executive awareness and develop the business case for what is possible? Or is it both?
This chapter addresses these tough questions. It offers real-world ideas on getting top management's attention to the potential of supply management by highlighting the bottom-line implications. That's followed by the overview of a set of guidelines, or dimensions, for transforming supply management from a transaction-based, reactive function to a powerful strategic force. Included in this discussion is practical advice on selecting the right organizational design to support the transformation effort as well as a discussion if good is enough is really good enough.
What Is Meant by Transformation?
It seems that every conference speaker, and every company, is touting transformation. It has become such an overused word that it is beginning to lose its meaning. Let's start the discussion with a brief review of two fundamentally different definitions.
Webster's defines the word transform as a change in composition, structure, character, or condition, "to change the outward form or appearance." That strikes us as a superficial, skin-deep definition. Now consider this alternative perspective. To transform means to fundamentally alter the capabilities and improve the achievement of sustainable results. That seems to us to be more in line with what organizations really should want to achieve. It is the latter definition that we employ throughout this book.
Figure 1.1 provides some depth to what we want to transform from and what we want to transform to. At a broad level, this transformation can be best described as moving from a tactical perspective to one that is strategic. Transformation is a complex construct with many dimensions.
Speaking the Language
Senior executives might stay awake at night for any number of work-related reasons. Based on our own experiences, the top sleep disrupters typically revolve around these issues:
• Can the company meet or exceed earnings and performance expectations?
• Can we grow revenues and earnings year-over-year?
• Are we able to reduce risk and volatility in revenues and earnings?
• How can we continually improve return on invested capital (ROIC) or return on equity?
• How can we create a unique business model, one that is difficult for competitors to copy?
The surprising fact is that a successful supply management transformation can favorably impact all five of the performance areas imbedded in these questions. As a corporate function, it is uniquely positioned — more so than most functions — to have a broad and sustainable impact on the business. The sad fact, though, is that most senior executives are unaware of this potential. A big reason for this lack of awareness is that no one has communicated the opportunity in his or her language. Awareness doesn't just happen by itself. The central challenge for supply management professionals, then, is to take a leadership role in helping their senior management understand.
Toward this end, every chief supply chain officer (CSCO) or chief procurement officer (CPO) needs to be conversant with the performance improvement framework shown in Figure 1.2. This is one of our favorite charts and is the essence of relating supply management to improved corporate performance. Let's walk through this framework briefly — a more involved discussion appears in Chapter 4.
Two important measures of corporate performance are ROIC and cash flow. ROIC is calculated by taking the annual earnings of a business and dividing it by the total capital invested in that business (long-term debt and stockholder's equity). ROIC is important because it is an indicator of the current health of a business. For a business to deliver value to its shareholders, ROIC needs to exceed the corporate cost of capital. A company that operates where its ROIC is lower than its cost of capital is essentially liquidating itself.
Improving profits helps to improve both ROIC and cash flow. Reducing the capital intensity of your business also helps to improve ROIC and cash flow. Improving profits while also reducing the capital needed to run the business has a powerful compounding effect on ROIC and cash flow.
So how do we go about improving profits? There are two fundamental ways: revenue enhancements and cost reductions. Supply management can — and should — play an important role in each of those areas, as indicated with examples shown in Figure 1.2. Supply management should, for example, take a leadership role in creating a more responsive supply chain, thereby helping the company to win more business (and increase revenues) from customers. Supply management should also take the lead applying good processes to better manage all areas of spending, not just those typically assigned to procurement.
So far so good, but how do we reduce capital intensity? Again, there are two ways: working capital improvements and capital expenditure improvements. Once again, supply management can play an important role in each of those areas. In many companies, for example, there is no clear responsibility for analyzing and coordinating supplier payment terms. This area is ideally suited for supply management to take a lead role, as is pointed out in a later chapter on working capital. With regard to capital expenditures, experience demonstrates that the sooner procurement is involved in new projects (even at the concept stage), the better the overall project economics and ramp-up time will be.
A thorough opportunity assessment for supply management requires a careful evaluation of the improvement opportunities in each of the four categories shown on the exhibit. Then, to tie it together for the executive audience, you relate those improvement opportunities to the company's income statement and balance sheet. Going that extra step allows you to demonstrate the impact of supply management on net income, earnings per share, ROIC and cash flow — all key areas of interest for senior executives. It's a powerful way to communicate the enormous potential of a transformed supply management organization in the language of senior executives and in a manner relevant to your company.
Each situation is unique. However, in our experience it's not unusual for a well-done opportunity assessment to demonstrate that a company's ROIC has the potential to double or triple from its pre-transformation levels. The next logical question is, "If that's the case, why aren't there many 20% ROIC superperformers in the business world?" The answer is painfully simple. Achieving that step-change in performance doesn't just happen by itself. It takes leadership and a well-designed, well-planned transformation roadmap.
Dimensions of a Successful Transformation
Supply management transformation refers to the successful conversion or metamorphosis of supply management from a transaction-based, reactive function to a pro-active, strategic driver of business performance — whose input is regularly sought by other areas of the company.
Companies that have successfully transformed their supply management activities into world-class performers have paid attention to six key dimensions of transformation. As shown in Figure 1.3, those dimensions are procurement's role, objectives, leadership, organization, best practices, and innovation and technology. Underlying these six dimensions are more than 30 specific initiatives that ultimately comprise a comprehensive transformation plan. (A more detailed discussion of the star chart transformation framework appears in Chapter 3.)
Before you even start thinking about which initiatives to focus on, you need a strong leader in place to sponsor the transformation process. The logical place to look is the head of procurement or supply chain management. If that person is not comfortable in a leadership role, then you'll need to look elsewhere. It's a sad fact that not enough people are comfortable in leadership roles. (Lee Iacocca's book, Where Have All the Leaders Gone?, is a great read on this subject.)
Simply stated, the transformation leader has to be willing to advocate change, which often means putting his or her neck on the line. Here's what we mean. First, he or she will need to develop a bold vision with stretch objectives that relate to the interests of senior management. And again, these objectives must be communicated in the language of the executive suite. The transformation leader must also be willing to lay out a specific transformation plan and roadmap, with concrete milestones that feature achievements rather than just activities.
Perhaps most importantly, the transformation leader must be willing to construct a business case that offers a performance commitment (that is, $X million of new cost reductions to the bottom line in each of the next few years) in exchange for the executive support (budget, people, outside support, tools, and systems) needed to make it happen. Without that show of confidence and commitment by the transformation leader, why would the rest of the executive team be willing to commit people and budget to the effort?
When one of the authors of this book was a corporate CPO, he did exactly what we're describing — and it made a huge difference to bottom line results. This approach helped create the excitement and commitment within the organization needed to energize the transformation. Believe it or not, once you're willing to go down this path, and once you are comfortable with the leadership imperative, the rest is easier than it might seem.
The Organizational Chart Diversion
One dimension of the transformation effort, organizational governance and design, demands special attention because of its potential to make or break the effort. Let's take a closer look, drawing on material from Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise.
To set the stage, consider the following scenario, which you may have actually experienced yourself. A company is experiencing overall performance problems that just don't seem to go away. The senior management team decides that the organization structure is at fault, and that a corporate reorganization will give the necessary boost to performance. Soon, the consultants arrive, and they draw up a whole new organization chart. New divisions are created on paper, management councils are designed, reporting relationships are changed, and job descriptions are re-written. Much time and money are spent on correcting things that may not have been broken in the first place. Management breathes a sigh of relief, thinking that the performance problems are about to be solved.
Yet performance does not measurably improve. In fact, it worsens. Employees become disenchanted with senior management for not fixing things and start losing their focus. Although a poor organizational design can impede success, organizational design is rarely a driver of success. Furthermore, the temptation to apply the organizational chart fix to an enterprise ignores an important reality: the informal relationships and networks inside an organization are often more important than the formal reporting structures and charts. Moreover, these informal ties are guided more by the organization's purpose, values, and vision than they are by the consultants' new chart. This holds true whether we're talking about the overall corporate organization or the supply management function specifically.
The message in all of this should be clear: Before redrawing the supply management organization chart, it is much more productive to first address the role, objectives, leadership, and best practices dimensions. Build your transformation game plan for each of these critical dimensions before tackling the organizational issue and the specific enabling technology.
With the right role, objectives, leadership and best practices in place, or at least planned, the foundation is created for success. You now can view organizational design in terms of your corporate culture and what you want to achieve through supply management. Put another way, you can view organizational design in a strategic, transformation context.
Thinking about this subject, author Rudzki distinctly remembers attending a CPO peer group meeting a few years ago when the discussion turned to organization. One of the attendees offered this solution to the various challenges being raised by the audience: "Procurement should be centralized, and all other corporate functions should also report into us." As you can imagine, that idea drew quite a round of laughter (even though some of the CPOs at the meeting would have liked to give it a try). But that bold suggestion did bring up some important questions: Can a centralized procurement function work well in a decentralized corporate culture? Can a decentralized procurement function ever be as effective as a centralized one? Who should procurement report to in the corporate hierarchy? These are all good questions.
At a broad level, what is the ideal organization design for supply management? There is no single answer, contrary to what many hope and expect. Yet the classic options basically boil down to three: centralized or centrally-led, hybrid, or decentralized. (Figure 1.4 lists the advantages and issues of each approach.) In general, a truly decentralized supply management organization has difficulty delivering world-class results in an efficient manner. Enterprisewide leverage and coordination is more difficult, and often more resources are deployed across more locations than would otherwise be necessary.
That's the reality. But believe it or not, some companies may not care. We've talked with CPOs who work for profitable companies. Their executive teams aren't showing much interest in optimizing supply management performance through strategic consolidation of key activities. Eventually, they will change their perspective if business conditions change.
A fully centralized supply management organization can present some challenges too, depending on internal corporate culture. Even if the overall corporate structure favors centralization, a centralized supply management function still must be responsive to the needs of the individual businesses. The satisfaction of your internal clients (your executives, business unit leaders, and other key internal stakeholders) is paramount — whatever structure is selected.
Hybrid structures are popular because they allow you to build and coordinate synergies across the company while being sensitive to each business unit's unique needs. This is often accomplished by co-locating procurement personnel both at corporate headquarters and at the business operations. In many cases, these individuals have dual reporting responsibility to the local operations or finance head and to the corporate CPO.
Regardless of which option ultimately proves to be the best for your situation, consider applying these two proven techniques: creation of an executive steering committee and a procurement council. The steering committee is typically comprised of senior executives, who represent corporate functions and business units. The committee provides high level oversight and support of the transformation initiative. In the best of all worlds, members of the steering committee also act as sponsors of individual sourcing teams. Their involvement can send a powerful message of commitment, both internally and to suppliers.
(Continues…)
Excerpted from "Next Level Supply Management Excellence"
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Copyright © 2011 Robert A. Rudzki and Robert J. Trent.
Excerpted by permission of J. Ross Publishing, Inc..
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