Bleeding on the Bayou: Procurement Near-Misses in Times of Price Volatility (Part 2)

Editor’s note: This is Part 2 of a post kicking off our new Spend Matters series of personal stories from procurement professionals. Missed Part 1? Read it here.

Another supply chain related crisis resulting from Fred Farmer’s antiquated approach to P2P had to do with controls around costing of finished goods, which were arcane to most of the organization and yet vital for ensuring profit. The weaknesses in Farmer’s costing update processes became obvious during this period of particularly high price volatility. As a manufacturing organization tied to an inflexible legacy ERP, Farmer’s company was based in standard costing, which required frequent maintenance in the form of bill-of-material cost rollups and updates to transfer prices.

Typically, this would not be a problem if the organization had not been adding product offerings at a rate of about 300 per month. With a bloated material master, in which only about 4% of finished goods contributed 80% of its revenue, the process for updating bill-of-material costs became severely bottlenecked.

The company relied on one mid-level analyst named Kailash Gupta with above-average ERP and database administration skills to complete these updates. Gupta, a middle-aged casualty of the global economy, whose knowledge of database and enterprise systems was supposed to land him cushy consulting gigs in close proximity to immigrant-family-friendly Evanston, New Brunswick or Mississauga, ended up taking a lengthy detour in Louisiana due to the urging of a distant relative who convinced him that the mild weather and low cost of living were a fair exchange for any sort of cultural advantage of a snowy northern suburb.

Reporting directly to Farmer, Gupta’s responsibilities included frequent bill-of-material cost rollups, which he completed for thousands of materials at one time, using scripts that he had developed over a decade with the company. As Farmer had no vocabulary for technology, he allowed Gupta to work independently without putting in place measures for capturing his knowledge for sustainability purposes. This worked quite well for the majority of Farmer’s tenure as Gupta retained the technological keys to the plant’s main profit lever and managed responsibly.

However, while Gupta accepted his environment and professional assignment with a degree of fatalism, his wife Sonali, the daughter of a prominent Sikh industrialist from Chandigarh, was less than satisfied. She was willing to accept being far from family in India, Canada and the U.K., but she was not going to adopt local customs, which she viewed with some disdain after an incident in which Gupta’s efforts to pressure Sonali to host a crawfish boil resulted in thousands of mud bugs escaping into their newly appointed living room, destroying the expensive sari-based upholstery. For Sonali, crawfish registered on a level of spiritual purity lower than beef, and she was not going to raise her children to be Jindal clones.

So in July of 2008, two weeks after my team of new operators entered the business, it was not surprising that Gupta had provided his two-week notice and announced that he was moving his family to New Jersey. For two months following his departure, the frequency of price maintenance dropped off and the plant incurred massive swings in purchase price variance and unprofitable sales. My team ultimately stemmed the tide of losses by rationalizing the material master, introducing a load-runner based scripting for mass updates, and putting in place a formalized function for master data management with documented business processes and a shared repository for required APIs.

Thoughts of Farmer and Gupta and the dangers of a condition known in some small circles as MLPM — Material Landed Price Myopia — are particularly relevant for our times. From this recollection, I hope to demonstrate how easily an executive can divert critical attention from the integrity of procurement and material management processes and how a price can become a counterproductive distraction.

During times of significant market change, it is far more important to remain competitive by ensuring overhead is minimal and job functions are optimized. This could mean working to expand the use of touchless POs in a manual environment; expanding vendor integrations over EDI or SaaS based platforms; or automating AP functions with electronic invoicing.

Even though Farmer is no longer at the helm of this steel tube plant, I am confident that after experiencing the trials of the late 2000s commodity super cycle, he would now encourage an approach to competition that rests on using technology as a basis to achieve operational leanness.

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