This morning, I'd like to welcome Aptium Global's Lisa Reisman back to Spend Matters. A couple of years back, Lisa traded in her Fortune 500 consulting and trading past to focus entirely on working with small and middle market manufacturers on direct materials sourcing. In full disclosure, I have an economic interest in her firm, considering that she's my wife. Oh yeah ... and if you ever have an issue with something controversial on this blog, blame her, as she put me up to it.
The thought had not occurred to me until very recently that such a large gap could exist between the "best" and the "rest" in terms of the make-up of the skills, competencies and strategies of sourcing organizations within small and middle market companies. But exist it does -- and with probably far greater extremes than one usually observes in Fortune 500 companies.
The differences in business practices between what high performing companies (and sourcing groups) do and the "rest" is absolutely vast in the middle market. Based on the past few years of trekking into hundreds of facilities in the Mid-West, I can usually tell when I walk into a plant or headquarters just how they'll stack up through looking at their lobbies -- the high performers post not only their quality designations and awards but their press clippings which feature examples of their innovation, efficiency and overall competitive advantages in the market.
But once you walk through the lobby, the differences really start to show. What follows are nine observations that I've seen on a consistent basis of late:
1. The "best" are neither defensive, territorial or threatened by the mere presence of an outside party. They are open in admitting their sourcing philosophies, strengths and areas of opportunity.
2. High performers tend to be lean organizations -- few people managing many millions of dollars in spend. We have seen $400m companies with the same number of sourcing staff as $70m companies. And these larger organizations with greater spend per FTE tend to be more efficient and effective.
3. I won't even get started on the subject of talent. But think strategic vs. clerk at the extreme.
4. Only an analyst firm would know whether this point was true or not but from our vantage point, higher performing firms seem to have a better grip on the sourcing needs of all plant locations (including all global locations) and have deployed common sourcing practices across all plants and/or divisions. I'm not suggesting that decentralized purchasing functions are more common among lower performing companies but rather higher performing companies seem to bring various geographies into a similar sourcing philosophy.
5. The sourcing approach in high vs. low performers is markedly different. High performers look at categories and seek to award categories to fewer suppliers. Contrast this with low performers who take on a rule of three -- get three bids anytime an individual line item increases in price and award contracts by line items as opposed to categories.
6. This next difference may be just due to the size of the organization, but there seems to be a greater supply chain emphasis in higher performing companies vs. a purchasing department emphasis in other organizations. But this might be solely due to the size of the company.
7. Higher performing organizations tend to have more long term contracts and fewer handshake deals than their peers.
8. High performers also consciously seek to award more business to high performing partners -- they care that their suppliers are growing and profitable.
9. High performers look for their suppliers for competitive advantage and the means to create competitive advantages.
In this short post, we haven't even gotten into supplier performance management, risk management etc., but trust me! There are significant differences between the best and the rest here as well. Indeed, in small and middle market manufacturers, there's not a bell curve when it comes to sourcing and supply chain performance -- there's a steep cliff with a drop-off that is almost impossible to climb back up once you've gone over the edge.
Lisa Reisman is Middle Markets Editor of Spend Matters.