Yesterday, I posted my first installment on the Spend Management talent game. Based on a presentation that I gave last week at the Best Practices xChange, the blog entry talked about why organizations need to upgrade the quality of their own resources, just as they would application software that's at the end of its lifecycle.
If you're curious why, just consider the myriad of shifts we've seen in procurement organizational design and approach in the past decade among more established and leading procurement organizations. For example, we've seen a shift from transaction -- or event --- driven sourcing and supply management models to process driven ones. In addition, there's been a move away from command and control accountability to matrixed accountability and structure (especially in fast moving environments). At the same time, knowledge capture and individual expertise have taken a backseat to knowledge sharing and management. And that's not to mention how advanced organizations have moved beyond looking at clearly defined, individual measurements (e.g., savings identification) to those that go beyond any one individual to gauge performance. All the while, top performers no longer look at procurement as a steady, stable career path with low risk and expected awards -- they now see aggressive career prospects and new levels of executive remuneration (and possibly even a seat at the head of the Boardroom).
The implications of these changing expectations and organizational design characteristics often manifest themselves in the ways leading procurement organizations are using new skills and expertise to transform their approach to tackling tough issues. To highlight how, let's consider the case of how organizations can manage through high commodity price volatility to reduce overall company and supply risk.
Historically, the standard approach to reducing commodity price volatility in the supply tiers was to hammer and threaten individual suppliers in hopes of avoiding price increases. This often involved threatening the use of "reverse auctions" when market conditions change. Other options included purchasing on the spot market whenever conditions looked unfavorable for on-contract spend and relying on trading companies to individually quote the best possible piece-part price on items. Perhaps the last ditch option was to pass along price increases to customers by increasing the amount you charged for products.
In today's environment, these old tactics would leave you far behind the competition. Clearly, new approaches -- and new skills -- are required to thrive in the current market. Rather than use the old techniques, for example, sophisticated organizations with the right types of talent are hedging commodity prices in their supply chain by using exchange traded instruments. And some are aggregating and understanding commodity risk exposure across operating units. This can help the more advanced Spend Management company forward buy commodity contracts for strategic suppliers to ensure supply and reduce maximum risk exposure. In some cases, these tactics might even take the form of purchasing actual mining capacity or raw material sources themselves (a type of vertical re-integration of the supply chain). Other companies are deploying advanced escalation / de-escalation clauses in contracts that work in their favor. Highly advanced manufacturers might even explore design alternatives to engineer out -- or reduce -- certain commodity requirements where prices are rising or material is scarce.
But advanced tactics do not stop there. Some companies test the market to see if suppliers incorrectly price underlying commodity components of a contract in the buying organization's favor (using detailed cost breakdown worksheets and options modeling and pricing theory). But more frequently, leaders are now thinking about commodity exposure and risk from a total cost perspective, factoring into account both best and worst case scenarios to understand risk and opportunity. This requires a new set of analytical skills, not to mention the soft hands to work inside an organization as a type of almost internal consultant serving multiple customers -- from the CFO to P&L owners to operators to design engineers. Clearly, to succeed in this environment with these new approaches requires a new type of talent. Check back next week as I talk about where to find it.