Welcoming a Guest Post from ISM — Emptoris' Kevin Potts

This afternoon, I'd like to welcome Kevin Potts from Emptoris to Spend Matters. Kevin is VP of Marketing at Emptoris and he has offered to share his thoughts from the ISM event earlier in the week. Thanks, Kevin, for your contribution.

Two of the hot topics from ISM included sustainability and supplier risk management. Gerd Hofman, Head of Purchasing for Hugo Boss, gave a key note presentation on the role of supply management in creating the "sustainable supply chain." He presented a very eye-opening chart showing that being green does not conflict with stockholder value. According to the chart for the period of January 2006 to July 2007, the EuroStock Index comparison of environmentally-friendly companies rose over 30% while the stock price of less environmentally-friendly companies rose only 22%. He proposed that sustainable supply base initiatives do not hurt stock price and in fact may help them because of the improved brand image in the consumer's mind. While he acknowledged that supply management must continue to focus on typical considerations when making decisions about supply approval (i.e., cost, quality and time to market), he advocated three new "sustainable" criteria -- environmental, social and economic costs (e.g., earnings for workers in developing countries) as important in the decision process. He proposed a three step supplier approval process framework which included (a) pre-qualification or certification, (b) monitoring and (c) audit and assessment.

What ISM show can be complete without a focus on costs? However, the discussion of costs at this show were not the typical costs that come to mind. They included

1. The "cost of doing nothing"
2. The "cost of good enough"
3. The "cost of not being lean"

The "cost of doing nothing" -- Ernest Gabbard, Director of Corporate Strategic Sourcing at Allegheny Technologies, gave a great presentation on the rising importance of risk for supply management. In his view, some of the biggest SOX-related risks companies face come from their supply chain. The critical point he made was that, whether procurement knows it or not, their actions over the past decade have increased their company's risk. For example, the focus on rationalizing/reducing the supply base has increased risk now that there is limited supply capacity. The ruthless short term focus on reducing price has increased risk now that there are commodity shortages and inflation (not to mention the credibility issue facing procurement -- i.e., "hey procurement, where is that savings you promised?"). The focus on outsourcing and low cost country sourcing has raised the risk with the rising price of oil. He advocated that supply management professionals stop thinking of themselves as cost managers and start thinking of themselves as risk managers. How should the supply management professional build the business case to get funding for initiatives to minimize and mitigate risk? He suggested using the same approach used to get the company to buy insurance. What company doesn't have insurance? Of course you may never need it, but if you don’t have insurance, and you get in trouble, it can be priceless. The same case can be made to fund supply management teams that manage supply risk.

The cost of "good enough" -- Dr. Larry Giunipero, Professor at Florida State University, gave a rich presentation on how bid optimization in sourcing reduces costs while supporting decisions around building a sustainable supply base. He focused on how companies need to get away from making supply decisions based on a "good enough" analysis. He peppered his session with lots of case studies high lighting how additional savings can be achieved over the "good enough" solution using bid optimization. One of the major examples he highlighted had to do with transportation. While not a new topic, with oil at $120 per barrel, companies are moving to rethink their bidding and negotiation strategies tied to transportation categories. This reminds me of one company we recently worked with. This company ran a 50 million euro sourcing event across 4 countries in Europe. They had expected a cost increase of 5% due to rising gas prices, but through clever strategies and flexible supplier bidding across 4 countries in Europe, they were able to keep the cost rise to 0.2%, a savings of over 4 million euros.

The "cost of not being lean" -- Finally I had lunch with supply management guru Dave Nelson, formerly of Honda Motors America. Boeing had just presented a highly attended session on their lean supply management initiatives. So, I asked Dave how important lean supply management initiatives are for American manufacturers. Always insightful, Dave cited that while at Honda Motors America, he helped pioneer these initiatives in the U.S. He highlighted the impact of these initiatives by comparing Toyota and Honda, who are very profitable and also have supply chains who are making money, verses GM and Ford, who are bleeding cash and also have supply chains struggling with bankruptcy. The take-away -- for the OEM to be profitable, the supply chain needs to be profitable, and lean supply initiatives make that possible.

Spend Matters would like to thank Emptoris’ Kevin Potts for his contribution.

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