Supply Management: The 'Hidden Lever'

Oct. 22, 2009
World-class procurement and supply management offer the potential for enormous, holistic top-line and bottom-line benefit.

Our nasty recession reminds us of a time-tested reality: through economic boom and bust, companies must continually look for ways to improve efficiency and enhance return on capital, and supply management is one way to do so. Done right, the payoff will be there. We've seen manufacturing companies move from an 8% return on invested capital to being 20% superstars; that's not fantasy.

So, why do many companies neglect a hidden lever -- supply management -- that can dramatically improve an enterprise's total performance? One reason, perhaps, is that numerous executives are stuck in a mindset that sees supply management as conventional "purchasing," there mostly to hassle suppliers into cutting prices.

But that leaves a lot of shareholder value unrealized and makes aligning companywide costs with revenue much more challenging. In its modern incarnation, world-class procurement and supply management offer the potential for enormous, holistic top-line and bottom-line benefit.

Successful companies -- as diverse as Proctor & Gamble, United Technologies and the 1990's Chrysler Corp. -- stand as proof.

They and other supply management-savvy companies pursue aggressive objectives that directly relate to improving total business performance, including:

Revenue Enhancements Through Collaboration

Here's a no-brainer: improving new product development can be a significant competitive advantage. But have you thought of asking your suppliers to help you speed up product launches at a lower delivered cost?

That may sound straightforward but a global consumer products company we counseled was surprised to learn that its raw materials suppliers saw them as only concerned about purchase price. The suppliers never thought that our client had any interest in collaborating. Once asked, many were eager to devote R&D skills. Our client came to see its supply management processes not as a tactic but as a strategic opportunity.

Pursuit of True, Year-over-year Cost Reductions

In the most successful companies we know, ambitious, quantifiable cost-reduction objectives are based on best-in-class benchmarks achievable with advanced processes, such as strategic sourcing and negotiations management.

Hewlett Packard and Commercial Metals Co. are two standouts, consistently accomplishing genuine, year-over-year cost reductions that go straight to the bottom line.

The performance difference can be huge: employing best practices can often generate double or triple the percentage cost reduction associated with conventional purchasing techniques. This does not only apply to "direct" purchases that go into the end-product. For so-called"indirect materials and services" (an often overlooked area), our experience confirms that 15 to 25% cost reductions are achievable -- in some cases, even more can be found.

Leveraging Commodity Risk Management Expertise

Especially valuable during periods of price run-up and volatility (think the last few years), world-class companies often insist that their supply management and finance groups work together. The goal is to mesh supply management's market knowledge with financ's risk management talents and toolsets. Doing this well can significantly reduce your company's Earnings at Risk. Leaders in commodity risk management include Procter & Gamble and Cargill.

Focus on Working Capital

Well designed and thoughtfully rolled out initiatives on payment terms and inventory programs are critical to improving shareholder value. But caution also is in order. A procurement department we know insisted on new payment terms of net 60 days from its suppliers. Alas, one targeted supplier was also a large customer that bought more from the first company than it sold to it. That supplier then imposed its own 60-day terms, causing a net disadvantage.

Bayer Corp. is an example of a company that approached suppliers thoughtfully and improved payment terms well ahead of others in the last decade. Global brewer AB InBev's recent shift from net 30 day terms to as high as net 120 day terms, on the other hand, generated ill-will, controversy and negative publicity.

Asset Recovery

By identifying and utilizing their idle plant and equipment, companies can avoid hard cash outlays at other locations. If no internal use is pinpointed, the idle assets are monetized, often with the help of outside specialists who can help obtain fair (not distressed) value. Multi-plant, capital-intensive businesses offer the greatest opportunity for asset recovery value. Companies such as Bayer and Bethlehem Steel (prior to it being absorbed into International Steel Group) set the bar in this area. Companies like Consol Energy are newly focused on this opportunity. Asset recovery programs, done well, can generate millions of dollars of value annually.

Optimize Capital Project Costs (both dollars spent and time to ramp-up)

Cost and timeline optimization can be achieved when engineering, plant operations, R&D, supply management and even suppliers are involved early in project conception and design. Secretive, "close to the vest" project management can be counterproductive. Rio Tinto Alcan is a leader in engaging its suppliers early to identify creative strategies that drive cost and schedule.

Supply chain departments, of course, cannot succeed in achieving great results alone. Senior executive support is indispensible, a transformation roadmap must be carefully drawn, and the right talent must be assigned. A mandate to transform may come from the top but goals and objectives cannot be created in isolation. The entire enterprise must be on-board and involved.

It all starts with recognizing the power of every company's hidden lever.

Former Fortune 500 Chief Procurement Officer Robert A. Rudzki is president of Greybeard Advisors, a leading provider of advisory services for procurement and supply chain management. He is co-author of "Straight to the Bottom Line," and the author of "Beat the Odds: Avoid Corporate Death & Build a Resilient Enterprise."

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