Lowell M. Hoffman
Lowell M. Hoffman, Managing Director, Global Sourcing Solutions, 193 Lyons Plains Road, Weston, CT 06883, Phone: 203-227-4455 Fax:203-221-0665 e-mail firstname.lastname@example.org.
Abstract: The supply chain concept requires the sourcing function to become more global in its perspective. Leadership in strategic supply management requires that we broaden our perspective to consider all members of our unique supply network and develop policies and practices which maximize the contribution of each chosen participant. A number of Megatrends can be identified which will help organize and focus the development of leadership purchasing management in delivering competitive advantage.
As Purchasing and Supply Chain professionals, we have become more focused on the strategic forces which shape our markets and our own company mission. We have allocated more of our time and resources to manage our processes while "automating" our handling of transactions.
Our task today is to consider the most significant changes now taking place and to project a direction and a vector to where some of these megatrends may be taking us. In order to provide a common structure to examine these trends, we shall use the Supply Chain Model. This model illustrates the interrelationship of the Raw Material Producer, the Package Converter (or the manufacturer/processor of our raw materials), the Consumer Products Manufacturer at the heart of the chain, the Logistics Provider Network which moves packaged product to the Retailer, or if you choose, the Consumer.
I have distributed a checklist of these Megatrends so that you might audit your own response to each and record an idea or two to apply to your own organization and the future requirements for competitive advantage in your own industry. Also, as a consistent illustration, I have placed a Consumer Products Manufacturer at the center of the chain and utilized packaging, for we all utilize packaging is some form, as a consistent input supply
First, to understand the Supply Chain dynamics and tensions, we must look at the connecting linkages: these are Product (which flows from Raw Material Producer to the Consumer), Money (which flows in the inverse direction) and Information which must move in both directions. The more fluid and open the information flow, the smoother the Supply Chain. I believe this to be a universal truth.
Thus Megatrend Number One is toward ever more open, dynamic, shared and interactive information management.
Secondly, it is the choices made in structuring the Supply Chain in which Competitive Advantage is defined. Our simple Supply Chain Model began with only one box at each of the stages. In reality, of course, there are many competitors at each stage. While there may be fewer of us manufacturing glass bottles or producing detergents than 5 years ago, our continuing effort to reduce our supply base and to focus on profitable customers is forcing choices. When we make a choice favoring one supplier, or one customer over another, we are making fundamental and lasting strategic decisions. At the same time, each of us deals with multiple suppliers and customers. Each relationship is unique.
Megatrend Two: While Companies A and B do compete, it is the full Supply Chain which is the battleground of competition and the deliverer of Competitive Advantage. The choices we are now making have the full potential of producing lasting competitive advantage into the millennium. The potential will be realized in the ways in which we manage and motivate the supply chain linkages, but this is, in the words of Paul Harvey, "the rest of the story".
Success of raw material and package suppliers is to a large degree contingent upon the success of their customers. Increasingly, raw material and packaging suppliers are becoming more aligned with their key customers. This relationship should certainly include an adoption of a customer's goals and strategies as their own.
The published strategies of Proctor and Gamble (see the President's and Chairman's letter of the 1996 Annual Report) are an example of visionary and long lasting strategies which form "mandates" for their suppliers.
The challenge to the Supply Chain colleagues of P&G could not be more clear. Our role in purchasing is to be the "Voice of our Company" to our suppliers. The voice must be consistent and confirmed by integrity of message to the repeated observations of practice. Those actions not consistent with their words will find effectiveness quite limited in the new environment of supply chain connectiveness and cooperation.
It is my own experience that our strategies are frequently not sufficiently adopted and "owned" by the first and second tier supplier network. Study of successful companies in many industries demonstrates that constant communication of core strategies and "walking the talk" through contract terms, measures of performance and award of new business are all important paving stones on the path to competitive advantage.
As Megatrend Three, I foresee increasing overt and ironclad linkage of supply agreements to successful implementation of customer strategies. This will take many forms. The "lip service" often paid to these powerful and evergreen strategies in pursuit of transitory price focused negotiations will give way to more quantitative and performance based contract terms.
KPI's (my shorthand for Key Performance Indicators) are increasingly shared between packaging producers and customers. However, my observation is that they as often become barriers and barbed wire fences which divide the links in the supply chain rather than the lubricant and fuel to better performance. Too often, these measures are unilaterally defined and measured. They are "reported back" as a sort of executive "Gotcha!". Buyers often insert contract language which is counter productive As a result, each party becomes disenchanted with the other.
As I look ahead, performance measures will still be necessary and appropriate in the three traditional areas of priority: P-D-Q. The 'P' is for "price" which will increasingly measure total product cost improvement rather than such "green eye shade" relics as "price variance".
The "D" stands for "delivery". Our most common measure is and has been some variant of "on-time" delivery performance. With the advent of consignment stores, kan-ban logistics and, more recently, supplier managed inventory, our leadership companies are involving Tier One and Tier Two suppliers in measures of production line performance to schedule.
The "Q" measure is one of "quality". In former times, we relied upon measured percentage of rejections upon receipt and inspection. These antiques are being replaced with measures of process variability and consistency. New measures will provide direct feedback and joint solutions to consumer complaints. In addition, new KPI's must be developed in areas of supply chain competitive advantage which will differ with the alternate strategies of the consumer products quarterback of each supply chain.
Rather than measuring "my" inventory, we will measure total supply chain working capital and turnover. This will allow managing of the system rather than lubricating the apparent "squeaky wheel". We will seek to measure and improve the lead-time from concept to new package launch along with other measures of innovation and responsiveness.
Thus Megatrend Four is the increasingly rigorous use of jointly negotiated Key Performance Indicators which measure progress toward defined customer driven supply chain goals and strategies. These KPI's are utilized to ensure continuous improvement and to "reward" or "withhold reward" to those who demonstrably contribute to achievement of competitive advantage.
As your own self-check, I suggest that you carefully review and consider your measures of supplier performance. No matter how well constructed, do they continuously promote cooperation, do they require the supplier to work as a member of the internal team, do they ensure that the supplier will only be rewarded when your own measures of performance also improve.
Outsourcing has become one of the "buzzwords" of the past few years. Many manifestations are prevalent. In simple forms, outsourcing is often a dressed up and re-suited form of service contract. For many of us, management of food service, travel bookings and office supply procurement have been "outsourced" for years. We just didn't know the Big Six Consulting word for it. Today, however, we do see new applications. Contract manufacturing of finished consumer products is commonplace. Third party logistics providers manage inventories, consolidate and deliver daily shipments to individual stores on behalf of multiple consumer products manufacturers. A key to success is managing these adjuncts to our supply chain as integrated resources rather than as contractors.
Megatrend Five will be the increasing development of "Product Delivery Teams" which fully integrate the skills and resources of the primary packaging converters in a joint effort to design customer winning retail package assemblies and contribute cooperatively to their production, fulfillment and distribution. These Teams will consist of multiple suppliers and services at several levels of our Supply Chain. While the primary manager of the Supply Chain sets the policies and requirements, much of the communications and action planning proceeds autonomously. This adds amazing efficiency and multiplies our own efforts. Increasingly, these teams will span national boundaries.
My review of Megatrends would not be complete if I did not also discuss the resolution of the many points of stress within the Supply Chain. Power is not equally distributed. This power sometimes changes hands. Stress in the transition is inevitable. Market forces impact unequally on Raw Material providers, Packaging Converters and Consumer Products Manufacturers.
With continuing mergers on an increasingly global scale, large packaging converters consume the lion's share of some raw materials. The competitive forces among and between these producers is now legendary. Smaller users increasingly risk significant raw material cost disadvantage. Buying consortia are forming to consolidate purchases of several smaller users to more equally compete with their large, global competitors. This practice has been utilized among soft drink bottlers, for example, for many years. As one example, the fourth largest purchaser of domestic tinplate is a buying consortium designed to ensure a competitive base price and terms enjoyed by their larger competitors.
Megatrend Six is not only the increasing frequency of consortia and their extension to global turf, but also the advocacy of Raw Material Producers who assist in development and sustenance of efficient consortia in order to establish long term, loyal customers who can compete effectively. Thus the supplier acts strategically to create its own growing and profitable market opportunity.
While we are discussing the importance of material pricing in the overall balance of an effective supply chain, it is appropriate to consider the distribution and management of costs. The accompanying chart illustrates the dynamic tension between members of the channel. Each party can exercise primary control over certain costs. Each cost is passed to the right until a consumer pays the price, often managed as a consistent "Everyday Low Price".
However, today's marketplace in applying Paul Samuelson's dictates of Economics 101, creates huge distortions and tensions which disrupt the chain. Between 1995 and 1996, according to data of Paine Webber, key raw materials such as PET and HDPE resins swung through 30% to 40% price swings in opposite directions. Meanwhile, aluminum can sheet and container board traversed more manageable movement in the range of 4% to 7%. By comparison, traditional agricultural commodities such as cocoa and soybeans moved in a narrow, by comparison, range of 5% to 8%. Is it any wonder that the supply chain customer stresses predictable and manageable cost and that buyers at each stage become so truculent?
These swings cause inefficient additions to and idling of capacity. Package users develop alternate forms to enable promotion of the cheaper product. Consumer product manufacturers spend time and resources to prepare alternate formulations with hoped invisibility to the end user. This is a gross distortion of efficiency. We are beginning to see the use of "price windows" at the key raw material cost driver level in which the raw material producer and package converter promise to maintain a fixed package price no matter the spot market clearing price of the raw material. Recent corrugated contracts for large users illustrate this innovation.
Megatrend Seven will be the leveling out of the seasonal/business cycle fluctuations in packaging pricing through cooperation between supply chain stages and the negotiation of pricing windows in which pricing is stabilized.
Additional Megatrends have been identified. Principal themes include increasing cooperation among supply chain competitors, globalized supply chains to attack regional cost differentiation and new understanding of packaging cost structures.
Leaving these Megatrends for review on another occasion, I would like to share one additional insight. It is the people who devise and carry out these strategies who are also evolving. Our purchasing roles are changing. The supplier sales and marketing function is, as well, undergoing fundamental change. Some positions and functions will become obsolete in the new Supply Chain era. However, I believe as well that the training and professional development of these vital administrators of change must be given significantly more attention.
Dollars for training are carefully budgeted. In some companies, O-J-T (On the Job Training) is all that remains. Most professional training is primarily focused on skill development. Since the traditional interface has been between the seller (perhaps titled an Account Manager) and a buyer' it stands to reason that each receives appropriate professional training. The Sales and Marketing manager becomes ever more proficient at selling something. The buyer, meanwhile, is sent off to a Karrass course in negotiation since this is perceived as his or her primary function. The seminar providers do well while the interface remains in tension.
Megatrend Eight is increasing professionalism of the "purchasing" process. We will continue to see companies placing their "high potential" managers in supply chain roles as part of their career development program. Leading companies are developing interactive training in which members of the supply chain (not just sales and purchasing personnel) are provided with opportunities to work together in understanding each others roles. A key deliverable is the development of new competency which cuts through and across organizational, functional and corporate lines to bring about effective change. This requires more depth than the mere establishment of cross-functional teams. Outside assistance and insight, I respectfully assert, is sometimes appropriate to focus and accelerate the process.
Further, I do wish to point out for those of you who may not have noticed, in this entire presentation I have not used the "P" word. "P"artnership is a great concept; however, I am certain that you agree that it is over-spoken and under-practiced. Thus this term must be consigned to the scrap heap or applied more effectively in accord with the principles discussed in this paper. It is helpful to avoid the "buzzwords" and to seek to convey insight by example.
These Eight Megatrends, supported by others, will provide strategic clues and insights to development of competitive advantage, not just for a company, but for its strategically developed and unique global supply chain.
May the Megatrends be with You!