Lesson #6: Reduce Trade-offs Altogether
Trade-offs exist everywhere, especially in regards to the trade-off of cash, cost, service and risk. “Service” is broadly defined, starting with the end customer and aligning back through internal stakeholders and back to suppliers. We discussed the cash versus cost trade-off above. But it could just as well be trading off raw material inventory levels (cash) vs. inventory (service) level performance vs. the cost of replenishment. Similarly, the trade-off could be between the relentless search for innovation and revenue traded off against the costs of creating that growth.
For P&G, AG Lafley’s desire to reduce unneeded internal corporate R&D spend led to de-centralization and the outsourcing of innovation processes. It had some success, as mentioned in Rick’s letter (e.g., Tide Pods, Downy Unstoppables, Downy Single Rinse). But many are also blaming the approach for a drier product pipeline. If new product revenue targets are missed, and costs have already been streamlined, then the only way to improve EPS (and executive bonuses) is to reduce shares outstanding via a stock buyback – and that requires cash. Thus, to liberate the cash without undue dipping into cash on hand, P&G turned to DPO since it had already been a historical top performer in DSO and DIO.
This sets the stage for procurement, which must continue to work business units and sites to reduce costs and free cash. At the same time, it must also engage suppliers in order to become a “customer of choice,” which in turn improves innovation and growth. Procurement becomes the facilitator of a “balanced scorecard of supply,” and while that means reliable, high-quality, low-cost, and responsive supply, it also means “innovative supply” – i.e., optimally and creatively positioning resources (internal or external) in the value chain to deliver innovative products and services that facilitate competitive advantage. And THAT is the definition of strategic supply management!
A “balanced scorecard of supply” inherently minimizes the trade-offs of various supply performance factors. This is the result of a center-led supply management program rather than just a center-led sourcing program. In other words, it strikes a balance between business-unit needs and corporate needs beyond a cost-centric sourcing program. Think of it as center-led sourcing, center-led cash management, etc.