--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---

The Incredible Payback


R. David Nelson, C.P.M.
R. David Nelson, C.P.M., Vice President, Deere & Company, Moline, IL 61265, 309/765-5101, www.dx.deere.com

84th Annual International Conference Proceedings - 1999 

Abstract. Early in my career, I thought if intelligent people were given a set of facts, that they would come to a similar conclusion. I was so naïve. I further thought if senior management of any major manufacturing company was given an opportunity in hard dollars to earn 3:1, 5:1, or 10:1 payback on an investment in leveling up their Supply Management capability and truly believed such results would occur, they would enthusiastically embrace, investigate, and implement such "Incredible Paybacks." I was even more naïve.

The facts are that senior management, plant managers and most management people to whom Supply Management answers, have many priorities. Many of them are of a seemingly urgent and more important nature, such as: To "keep the line running (at all or any cost)," to deal with serious safety or environmental violations, involvement in legal issues or active litigation, to countermeasure a local major public relations disaster, to plan and respond to major downturns or sudden upturns in business, to countermeasure a major field failure, to lobby for or against a major piece of state or federal legislation that will significantly affect the company, to respond to some major union problem, strike or contract issue, to develop a new strategic plan, to introduce a new product, to attend and participate in board of directors meetings, to deal with a serious employee problem, to set long-term product strategy, etc.

The point is, this list represents an endless balancing act of the many priorities which management people must deal with. Because they often haven't been told, or don't understand or believe the significant impact Supply Management has to contribute to the welfare, health, and long-term success of the company, this priority so often gets lost in the more urgent nature of the daily pressures to which these management leaders are subjected.

The Past. Most companies, or at least many companies, used to be highly vertically integrated as was my present employer -- John Deere. John Deere used to purchase only about 35 to 40 percent of the cost of the products they sold because they owned their own foundries, press shops, machine shops, etc. The types of purchases made were more basic raw materials, and Supply Management was seen as more tactical. Our jobs were to quote, order, and expedite the materials in on time. The skill set and talent to accomplish this was considered far down the food chain. Supply Management people were rarely included in the inner circle of senior management where they could contribute in a meaningful way to the strategic decision process, which is the engine that runs the company.

The Present. Today, the situation is vastly different. Most manufacturing companies are far less vertically integrated and purchase far more sophisticated systems, products, and services that add up to 60 to 80 percent or more of the cost of the products they sell. Think about it. Often only 20 or 30 percent of the cost of the products many companies sell come from hundreds or thousands in your workforce, including all the capital expenditures in factories, machinery, employee pay and benefits, research and development facilities, etc. Yet, particularly in manufacturing companies, this is where 80 or 90 or more percent of the companies' leadership and talent are. For example, in one company I know well, there are 600 manufacturing engineers whose main purpose is to help transform their own workforce to "lean manufacturing techniques." Without question, an honorable and important priority. However, in this company, as in many companies, the total manufacturing cost and overhead only make up approximately 20 percent or less of the cost of the products they sell. Yes, a 20-30 percent savings on that 20 percent is important. However, compared to the opportunity in the 70 percent of purchased cost of the product they sell, it falls far short compared to saving 20-30 percent of the 70 percent, which could be saved if those 600 engineers or a major portion of them were working with their supply base. What is the matter with this picture? Why are so many companies' priorities so out of balance, considering the payback that could be received for the same amount of investment? The truth is that in some small amount of manufacturing companies, the management has recognized their priorities properly. They are gaining the 3:1, 5:1, or 10:1 payback on their investment they make with their supply base, and if one of these companies with such enlightened management is a competitor of one who hasn't, guess who has the best chance to win - the competition. In many companies today, the capability of the supply base affects their competitiveness more than any other single factor.

The Future. Have you ever noticed the phenomena, which is a like a "law of nature," that when there is a great need that gets satisfied with a great solution, there is almost always a great success.

Today where many companies are buying 60-80 percent compared to the old days of 35-40 percent of their product cost, the skill sets and talent required to make this happen are far different. Yet, most companies are slow to recognize this change has, in fact, occurred. Most companies still view Supply Management as more tactical, even though their situation has vastly changed. So what must we do to help our management understand the opportunities that a high-level Supply Management capability offers?

All of us in Supply Management know the great need. We have talked about it for years. We have written articles and white papers and have made speeches (mostly to ourselves). In surveys it is often the #1 concern of Supply Management people. As we have investigated the future governance for NAPM, it is one of the top concerns. It is always brought up in our discussion groups. One of the major wants of our NAPM Membership is for NAPM to be more effective in informing, educating, teaching and training our management to be more aware, knowledgeable and to take advantage of the "Incredible Payback" Supply Management can give to their companies. My goal is to do exactly that! The companies who take advantage of the "Incredible Payback" Supply Management offers, win the race and get the gold. Those who don't, finish in 2nd place.

I am convinced that our management is, in fact, eager to do the right thing if they understand, believe, and are convinced that Supply Management has great benefits for the company. We have a job to do to educate, improve (through examples), what benefits we can bring to our companies. We must present the proposals in their terms, for example. If your Supply Management department is given additional resources to implement some "Best Practice" activities, what is the return on this investment to the company and how does this compare to other investments your company makes? It is a simple, but powerful method.

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