In the past, I’ve taken pot shots at consultancies, specifically pointing out their lack of appropriate focus and savvy when consulting in the supply management arena. I recently had a reader contact me and pose the question “What would be the proper approach be for a purchasing consultant?”
I worked as an executive level consultant for 10 years and will share the approach I used.
I see two categories of consultancies; i.e., those that can effect transformational change and all of the rest. Most are the latter. Further, I tend to believe that larger consultancies bias towards the all-of-the-restcategory. Why? Because an effective consultant needs to understand the specifics of a client’s “extended enterprise”—both internaland supplier operations—as well as the dynamics of the markets in which the client participates. The bigger the consultancy, the more the tendency to rely on cookie-cutter transformation models whose impacts end up being more generic than what is actually needed to optimally satisfy a particular client’s specific needs. These models tend to work within—instead of outside of—the box.
In addition, while many people working for these larger firms have advanced degrees—book smarts”—I haven’t seen many with actual executive-level supply management experience.
On the other hand, smaller consultancies tend to be led by experienced former executive personnel with a track record of being able to develop an understanding of individual client needs.
My approach to consulting was based on mentoring client personnel so that they could take-on all project related activities; i.e., teaching them to fish. Prior to making a sales pitch to a potential client, I would learn as much as I could about their products and markets, including how they fared against their competition as well as the operational effectiveness of their extended enterprise; i.e., suppliers and internal operations. Along these lines, a lot can be learned about a company from their annual reports and talking to a few of their suppliers.
After that, I would meet with the management of the company and, if successful in getting their business, introduce a flexible strategy that would focus on improving executive level performance metrics in those areas considered most important to their overall business. I will outline my approach below, but first let me relate an experience of how not to consult on supply chain.
The Wrong Approach
I once ran into an executive director of a state-based consultancy that was subsidized by both the federal and their state government. This organization was trying to develop a supply chain component to add to its portfolio of services. I knew that director had no experience in supply chain and also that his people—while they were competent in the ABC’s of lean—had little background in purchasing, and none at the executive level. Based on this, it struck me as a bit of a stretch that they were attempting to take this on. In discussing my concerns with him, I posed several questions, including:
“Without having background in supply chain, how will you know what your client needs?
He smiled and answered along the lines of: “I’ll ask the client.”
I may not be the sharpest tool in the tool kit, but I can tell you that the worst thing a consultant can do in trying to gain a client’s business is ask them what they need. Companies bring in consultants either because they don’t have the needed expertise and/or can’t—on their own—determine the root causes of factors that negatively impact their ability to compete.
I followed the progress of the above organization’s attempt to become proficient in supply-chain consulting, and it wasn’t a surprise to me that over time their new “proficiency” never generated a significant amount of their overall income.
My opinion is that a consultant needs to be hands-on. In other words, sitting behind a desk analyzing spreadsheets might be necessary, but it is certainly not sufficient for understanding a client’s operations. And as an aside, I strongly believe that the same strategy should be used by supply management personnel, but unfortunately the trend is for fewer such on-site visits.
Most of my clients were individual factory—not corporate—engagements. Consequently, upon being hired, the first thing I would do is try to understand unit operations, starting at receiving inspection and ending at the point where the end-use product is ready for shipment. This was not a standard, superficial walk-through. In my experience, you need at least a day—and sometimes several—to identify and understand the order of the steps and processes and their capabilities.
Prior to retaining me, one of my clients had engaged a mid-sized consulting firm which, uncomfortably, continued on with their work parallel to mine. This consultancy applied a cookie-cutter approach based on reorganizing/downsizing the supply management function as well as updating job descriptions. In other words, it wasn’t really focused on making strategic changes to the client’s approach to purchasing. And they weren’t interested in knowing anything about the client’s suppliers other than their as-delivered quality, on-time delivery and price. After six months, they had produced no significant results, and the client didn’t like the direction they were being led—which is why I was brought in.
So, what did I do? I set up a meeting with factory’s general manager to reviewhis performance metrics, having him specifically identify what he felt were the most critical indicators of effective factory operations. I then asked him which of his organization’s functions he thought had the biggest impact—positive or negative—on those metrics.
It is usually very interesting to learn what functional areas a factory manager thinks are most important to positively impacting important factory performance metrics. For instance, many companies assign responsibility for raw material to operations; however, supplier order fulfillment flexibility probably has the highest impact on the amount of needed “safety stock.” Similarly, a general manager considers material variance the only metric that has a primary impact on the supply management function; i.e., year-to-year purchased material cost. In reality, purchasing’s strategies and management processes have impact across an entire operation’s effectiveness.
I’ll give an example of what I mean by this:
The information I gathered from a client was used to put together an alternative metric/responsibility framework with a focus on how the purchasing function impacts each area of measurement. For instance, customer fill rate is considered an executive-level metric generally assigned to marketing. Marketing’s role in ensuring necessary performance is typically based on understanding their own factory’s production agility. This is directly related to factory inventory turns—an executive-level metric. Using this data, marketing puts together a plan defining the amounts (by SKU) of the pre-built finished goods inventory—also an executive level metric—needed to adequately support market demand when forecasts are off-target. And, as we all know, all forecasts have error, at least to some extent, leaving a manufacturer with either extra inventory or not enough.
However, most clients I’ve worked with have internal manufacturing flexibility that is far better than that found in their supply chain. Consequently, to reduce pre-built finished product inventory, supply chain operational flexibility needs to be improved. Marketing has nothing to do with developing this increased capability and so should not have responsibility for the finished goods inventory metric.
To help facilitate supplier operational flexibility, supply management, not marketing, needs to quantify supply capacity and inventory turns and then assist suppliers in planning for improving them. This requires putting together flexibility-based order fulfillment policies and assigning resources to working with suppliers so that those policies can be met. The supply management function should have the greatest impact on the need for both raw material and pre-built finished goods inventory and be given credit for the positive financial impact when they can be reduced, as well as the negative financial impact of having to rely on them in the first place.
The inverse of inventory turns is, in general, a good approximation of “true” operational lead time. The concept of true lead-times is based on the time associated with a product’s critical path. Consequently, true supplier lead-times can be used as a quantifiable metric of supplier flexibility and related to the necessary amounts of raw material and pre-built finished product inventory.
The bottom line is that most pre-built raw material and finished goods inventory shortfalls happen due to lack of supplier ability; i.e. longer “true” lead-times, which include the time it takes for product to travel from a supplier’s shipping dock to a customer’s receiving dock. Reduction in the needed inventory can only be addressed by having true lead-times as a primary criteria in supplier selection or, with incumbent suppliers, helping them facilitate lead-time reduction, usually the form of supplier development or through application of the OEM’s own continuous improvement personnel.
There are many other executive-level metrics that are directly related to supplier capability and performance in these areas—and consequently, responsibility for them should be assigned to purchasing. This implies that purchasing should be regarded as having a wider impact on company financials than just material variance. An impact, by the way, that can dwarf OEM price reduction efforts.
In my experience this isn’t taught in MBA schools, and it really needs to be.
Anyway, digging deep on the metrics worked well for me as a consultant. I hope you can apply this principle within your own organization.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.