Pmac Cfo Procurement 2006


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presentation to the 2006 annual OIPMAC conference - why the CFO doesn`t beleive procurement savings, and what to do about it

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  • My name is Nick Seiersen, I work for KPMG, the accounting firm. It’s a real pleasure to be here with you this afternoon. These are interesting times in the Supply Chains of today’s organizations. It is my read that there is a grave crisis of relevance, this leads to a credibility gap, that undermines the trust the supply chain professional must have within the organization to be able to suceeed Risk and compliance concerns have bubbled up to the forefront, just as the day to day job in Supply Chain Management gets more and more competitive. It’s a challenging environment you have chosen to work in, and it is certainly very exciting these days. This presentation, and any questions you care to ask, will help you plot how you can make your supply chain ready to prosper in this new century. Lets get started
  • Today’s session will start with a brief overview of KPMG, for those of you who do not know us. Then I will cover some recent Supply Chain anecdotes, and draw some sense from them. Finally, I will offer some advice on what to do to be successful in the Supply Chain.
  • According to the CSCMP (the Council of supply Chain Management Professionals), Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the Logistics Management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology. In the pharmaceuticals, they call it from molecule to cure. In food, they call it from gate to plate, or from dirt to dirt. Have you heard of “ashes-to-ashes”? Some see Supply Chain Management as a divine calling, but there are many paths to Supply Chain Management. Here in Canada: PMAC has shown a strong interest in supply chain management for many years The Institute for Supply Management was born out of the US purchasing managers’ association SCL (Supply Chain and Logistics Canada) has renamed from Canadian Association of Logistics Management The Logistics Institute clearly sees procurement as part of its P.Log. scope, as they bring the certification to China and elsewhere in the world The Council of Logistics Management has renamed to CSCMP, with roundtables in Toronto and Montreal APICS and their associates are re-branding into supply chain from manufacturing The financial community is recognizing the importance of SCM in Cash-to-cash cycles Everyone seems to be converging – dare I say coveting? - on Supply Chain Management Prompt to make spheres appear
  • This chart shows Insurance disasters over the last 15 years. It looks as if they are getting more frequent and bigger. Total costs from natural disasters have been estimated at $225B, up from a record of $118B in 2004. Only two of the incidents in this chart are not weather related – the 1994 California Earthquake, and the terrorist attacks of September 11, 2001. The Tsunami of December 26, 2004 did not make this list of business and property losses , yet it was clearly highly disruptive, beyond the huge loss of lives…
  • In this list of the 11 greatest Man-made supply chain disasters published by Supply Chain Digest, you will see that many of them are systems related. Information Technology is truly a competitive differentiator – there are those that know how to use it well, and those who mis-manage their systems infrastructure and projects. Lets talk about 6, 8 and 11: these are all example of companies that failed to assess what the organization could actually deliver. It is characteristic of companies that manage with the mantra “the Supply Chain guys will work it out.” It is fair to assume that the Supply Chain professionals did not have a seat at the table when these plans were hatched. And that is a big problem. Item 10 is a sobering tale of off-shoring gone wrong in 4 points: Capabilities : were the capabilities really there, and were they really brought to the table? We can say that the deal that was set up was wrong Failure to execute : once they were into the new supply relationship, the company failed to manage the relationship to fix the issues Lack of visibility : the company failed to obey the adage – “The further away it is, the more closely it must be scrutinized” not out of sight, out of mind. The issue here speaks to the law of management half-life, sometimes expressed as “your frequency of checking must be less than the time it takes to go wrong, so you can catch problems before they really mess things up…” Narrow-minded view of the issue : the company saw lower labor costs and did not see the bigger picture
  • Look at the hot spots – many of them are LCC’s – low cost countries - many of our companies are trying to buy from them. Thailand is yellow, but strike, riot and civil commotion is identified as a risk. And recent events suggest that may have been a good call when insurer Aon prepared this map. North Korea is dark orange, with risks of civil commotion, war, sovereign non-payment, legal/regulatory, and political interference: Need I say more? The questions you should be asking are: Are we managing the risks inherent in buying from these unstable countries? Are we realizing the premium this risk justifies? And, the bigger question is: Do we really understand these risks and how to manage them effectively????
  • And Risk is not the only issue with LCC. More and more Supply Chain work is actually being performed by third parties on your behalf. The significance of this is that the customer relationship is being farmed off to third parties, whose values may not be aligned with yours. Take this example from the trade press recently. Moving across the globe costs money – big money. If you get behind in your schedule, air freight will cost a lot. And all of this activity is highly stressful on the environment. The National Retail Foundation in the US recently projected 4 to 8% growth in container traffic in the major ports in August, September and October 2006. The outlook is for next year is highly dependant on the state of the economy, but is expected to be higher than the growth in the economy and in domestic freight. Inbound supply chains are slow, costly and highly exposed to disruption – more important customers take your spot in the production schedule, or on the ship across the ocean, natural disasters, infrastructure congestion, political strife, “random” or arbitrary inspections,… Our experience is that the more rigorous and predictable you are, the less avoidable disruptions you have to deal with. Building trust takes a lot of work and time, and can be destroyed in a moment. And trust is one of the things YOU do not necessarily have within the organization.
  • The CFO is often a crusty curmudgeon. This survey shows the significant gap between how important various aspects of the supply chain are, and how good a job he thinks you are doing. The biggest gap is also the most important in their eyes – customer relationship management You are next And then comes cash –important, but the CFO understands this well, and often it is under his control, so he thinks everything that can be done is being done. And therein lies another important message – the CFO does not understand this Supply Chain stuff. He doesn’t understand what you do, and he doesn’t give you credit for your achievements. Lets look at that a little closer
  • One of the biggest issues facing procurement professionals – and it’s the same for the other players in the supply chain – is that the CFO and his minions do not see the savings – they only see less than half what you are claiming. This is detailed in a recent study by Aberdeen Group. The CFO thinks your estimations are suspect – to the tune of 30-40%. Some of it is how you define savings – improvement over first offer, over last year, over budget, over base-line, over indexed cost base, etc. One critical issue is that there are very few standard savings computation methods agreed and used across today’s companies. Is it a hard savings or a soft benefit? If the deal starts near the end of the year, do I annualize for this year or pro-rate into next year? Is it a Balance Sheet or a Cost item? Is it cost avoidance or cost savings? Where and how will it turn up in the company’s financial statements? Worse, the savings made in one area are often spent in another, so the first savings never showed up in the financial statements. The next issue is compliance of the organization and the vendors to the new deal – and Aberdeen found that up to a quarter of the savings were lost here. We all know compliance is an issue. So does the CFO, and he is looking for solutions. The CFO thinks you are leaving money on the table . Lack of alignment internally and externally leads to 5-7% loss in savings. Aberdeen found that complicated or strategically sensitive elements (such as cash-flow/working capital, trade financing, and payment terms) were often left on the table. Either these items are not understood – and not seen as opportunities – or they are not in the incentives of the managers negotiating, and they are not addressed. Since Finance functions only provide dedicated resources to procurement in 10% of the companies that responded, this sorry state of affairs is not going to get better soon. Finally, The CFO thinks you are not doing enough . The Centre for Advanced Purchasing Studies estimates that 7-40% of spend is indirect (for a cross-industry average of 18.5%). The Aberdeen study found that CFO’s think 54% of spend is under the control of their procurement professionals. The implication is that the rest is not being addressed as effectively as it could be. Now, we all know that the procurement professional brings a rigor of process and predictability of outcome , experience of what works and what doesn’t work , how to get the best deal from the market , how to side-step the suppliers’ usual tricks , how to defuse the incumbent’s advantage , how to quantify a “value sell,” a solid grounding in contract and commercial law , understanding of typical risks in the process , and a view of how long it will take , and what has to be done before the deal is done . Line management frequently lacks this perspective, and can be manipulated by the suppliers’ sales forces that play this game all the time. But the Supply Chain professional does not often have a seat at the table when the strategy is being crafted, and when key decisions are made. So what do these anecdotes tell us about supply chain management as we confront the challenges of this new century?
  • Big change is upon us. Some of it we could have seen coming, if we had been looking… New Channels – Internet, Big Box retailers, Category killers, Hard Discount, and all the other channels…all contribute to atomizing sales volumes, making channels difficult to manage and volumes difficult to forecast. And we are seeing more “innovation” Some of it is “lipstick on a pig” brand extensions Some of it is enabled by the explosions in IT Some of it is really process and business model innovation – Dell computer, widely credited with revolutionizing the supply chain model in PCs, now talks about Business Model life expectancy has fallen from 30 years to 10 years. This kind of change is disruptive, Big Time. And you can expect a lot more of it. North American Trade with the world has outgrown the economy and domestic freight for years, it continues this year, and is expected to do so again next year. And we have already seen the increasing incidence and gravity of disruptions in the supply chain
  • Some of these trends we could have predicted – but not all of them… Enronesque financial manipulation brought us SOX and Bill 198, requiring certified assurances from third parties, the press has reported the huge costs of this mandated compliance The escalation of world-wide terrorism with 9-11 brought us Canadian Customs requirement to file prior to shipment to Canada, and FAST/PIP compliance requirements – for the shipper, the carrier, and even the driver Greater environmental awareness has at last brought us Reduction of Hazardous Waste in the high tech world. To do business is to warrant that you are compliant with these regulations. Even Lee Scott The CEO of Wal-Mart, and previously in charge of their supply chain, is now trying to become the poster boy of sustainable business practices, following in the steps of BP’s highly visible PR campaign. GE has a very public sustainability agenda Even the good news has a potential downside: As more and more ethanol is added to fuel for our cars, that brings greater competition for food cereals for breakfast, for your livestock, or to produce ethanol: Drive or eat, you very well may have to choose in the not distant future. So where does all this leave us? There is an intense and growing tension between a greater desire for predictability, driven by legislation such as SOX/Bill 198, FAST/PIP requirements, guaranteed service levels, and the increased uncertainty of outcome , such as volatility of price and cost with the US$ and commodity prices, natural and terrorist disruptions, atomization of demand, more and more use of third parties with greater physical and cultural distance. … and prosperity also requires messy and risky innovation on top of all of the operational challenges.
  • So how do we deal with all these issues? I believe we start with setting some basic building block, what I am calling Truths – and I will ask you to take them on faith at this point. Try them out and see if they work for you. They certainly work for me! Be aware of what you know , know when you do not know enough and when reach for help : “Be Still and Know” what you can bring to the corporate table To paraphrase the Alcoholic Anonymous Pledge: “God give me the strength to drive the change we need, the wisdom to recognize where I can’t do it alone, and the fortitude to bring others that can along for the ride” Work out what you do well, find out who does the other stuff well, find partners that can work well with you, align expectations, align metrics, align outcomes, align reviews, align planning, align rewards, … 2. Mitigate the risks you can avert, build contingencies for those that may happen, insure the risks you can’t handle otherwise, and pray for any that cannot be handled by these three strategies – but have a contingency plan too! Work out what must be done, no matter how hard it is, if it has to be done, it must be done. Let me illustrate that last point: Dell started offshore call centres to save labor, like many other companies. They also measured their success on the number of calls that could be handled, again, like many other companies. Their customer satisfaction nose-dived, and they actually lost market share. Their consumer surveys showed that there was bitter dis-satisfaction with the off-shore call centres. So Dell changed the call-centre goals, and measured them on calls successfully resolved. Two amazing things happened. Customer satisfaction soared, and call volumes fell, by 2 million calls last quarter, and the callers on hold waited half as long as before, so their costs actually went down. The Supply Chain has this capability to defy gravity – to improve outcome at reduced cost and effort. But it takes the courage to buck trends, and to step back far enough to see the big picture. Sometimes this means looking squarely at the issues in your colleagues’ – or your suppliers’ – back yard. And that does not always win you friends.
  • So how to go forward into the 21 st century? My advice fits into three buckets: Check Your Alignment – Tie your goals to those of your stakeholders: With your own company’s Value Proposition, with your company’s Agenda, with your trading partners, and with your own people Articulate Your Contribution - Learn to speak the language of business and finance. Use this to get invited to the table where decisions are made. To paraphrase John F Kennedy “Ask not what my company does for me, but what I can do for my company.” You must be able to spell out: What Have I Done For You Lately? What Is My Core Purpose? What Else Should You Come To Me For? How else can I contribute, if only you thought to ask me Here’s How We Can Do What You Are Trying To Achieve, I can help us go where we want to be Make It Happen – Throughout my career on 2 continents, over 10 countries, and in three languages, the one common theme of the dozens of healthy and distressed organizations I have worked with, is ineffective execution. The most successful executives I have worked with Get the Job Done. In the Supply Chain” This means managing events at a granular level, and event management systems are invaluable to help you do this. They track what should be happening, and tell you if a deadline was missed, so you can focus on fixing the problems before the shut the plant down. It means setting up Service Level Agreements and measuring that everyone is meeting their commitments through Key Performance Indicators. There are some pretty nifty scorecarding applications out there, but they can only track what you tell them. The hard work of managing outcomes is still yours. Have I mentioned the importance of alignment of expectations, metrics, outcomes, reviews, planning, and rewards? The business environment is tough. Most of the stovepipes have been milked, many are trying to collaborate across their internal silos and across the company boundaries, and are rubbing up against mis-aligned priorities. As we saw earlier, no one has a lot of faith in the guys doing it today! I believe that with the understanding of the overall context, the challenges, and these three truths, you can change that.
  • Lets review what we have talked about today. We looked at some defining trends in today’s supply chain Greater disruption and uncertainty as supply chains get longer Greater scrutiny for financial and security misdeeds More and more key tasks performed by increasing distant third parties – both physically and culturally The low level of trust that exists in the supply chain – starting inside your company This gives us an environment of extreme tension between massive uncertainty and stultifying predictability I offered some advice that we can sum up as: Alignment – get everyone pulling in the same direction Explicit – make sure it is clear who is doing what, and start with yourselves, because supply chain professionals have credibility issues even inside their own companies Execution – with every functional group drooling over ownership of the supply chain, success will come to those that get the job done. In closing, we can align the right goods and services in the right place at the right time at the right terms at each of our companies. It won’t be easy, but you knew that when you went into this line of business. I wish you strength, wisdom, and fortitude. To quote the Home Depot ad: “You can do it, we can help!”
  • Pmac Cfo Procurement 2006

    1. 1. The 21st Century Deals A New Supply Chain Hand – How To Play It? OIPMAC National Conference, 13 October 2006.
    2. 2. Today’s Session <ul><li>About KPMG </li></ul><ul><li>Recent Trends and Events in the Supply Chain </li></ul><ul><li>The State of the Supply Chain </li></ul><ul><li>What to Do? </li></ul>
    3. 3. What is Supply Chain Management? PLAN, DECIDE, REPORT <ul><li>Trends: </li></ul><ul><li>Longer Supply Chains </li></ul><ul><li>Security </li></ul><ul><li>Visibility </li></ul><ul><li>Responsiveness </li></ul><ul><li>Product and channel explosion </li></ul><ul><li>Cost vs. growth </li></ul><ul><li>Collaboration </li></ul><ul><li>Outsourcing </li></ul>Purchase Make Deliver Service Sell
    4. 4. 10 Most Costly Insurance Disasters: Becoming More Frequent, Worse? #7: Wilma World’s Top Ten most costly losses incurred by the insurance industry, Complied by Swiss Re, Fortune Magazine, 2006 $6.9 $8.9 $22.2 $11.7 $18.5 $20.7 $8.3 $10 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 $10 $45 #10: Daria #9: Mireille #2: Andrew #4: California Earthquake #3: 9-11 #8: Charley #5: Ivan #6: Rita #1: Katrina
    5. 5. The 11 Greatest (Man-Made) Supply Chain Disasters
    6. 6. Aon’s 2006 Political and Economical Risk Map Source:
    7. 7. Longer Supply Chains 7-8+ weeks, $4,000 - $5,500+ per container Place Order Agree Terms LSP Arranges Transportation Supplier picks order and loads container (2 weeks) Container arrives at Consolidation Centre (optional) Container Arrives at Embarkation Port, Customs Clearance Container is Loaded onto Ship Ship crosses Atlantic Ocean – 14 Days Container is Destuffed or Put on a Cross-Country Train ($1,200) or Truck ($5,000) Container is Drayed from Debarkation Port to Deconsolidation Centre Container is Unloaded from Ship, Customs Clearance, Inspection ($700-$1,000),… Container is Delivered and Destuffed, Returned Same Day or Demurrage $75/Day Arrival at Destination Rail yard
    8. 8. The CFO’s View of the Supply Chain There is a gap between process importance and performance Source: CFO’s and the Supply Chain, CFO Research Services & UPS Consulting, 2003 34% 33% 39% 46% 51% 63% 50% 47% 53% 56% 59% 69% 73% 74% 74% 81% 0 10 20 30 40 50 60 70 80 90 Product design Supply chain strategy development Corporate planning Operations management Logistics Cash management Procurement Customer relationship management % citing as &quot;very important&quot; % saying performance is &quot;very good&quot;
    9. 9. The CFO Does Not Believe You! <ul><li>You think you are putting 75-80% savings in the bag </li></ul><ul><li>The CFO gives you credit for less than half that – 34% </li></ul><ul><li>30-40% estimating & tracking </li></ul><ul><li>20-25% compliance </li></ul><ul><li>5-7% negotiation effectiveness </li></ul><ul><li>18.5% unaddressed spend </li></ul>The CFO’s View of Procurement, Aberdeen Group, September 2005
    10. 10. More of the Same – Just Much More of It… <ul><li>Price & Demand Volatility </li></ul><ul><ul><li>Shortened Product Life Cycles </li></ul></ul><ul><ul><li>More channels, more differentiation, lower volumes </li></ul></ul><ul><li>Longer Supply Chains </li></ul><ul><ul><li>Low Cost Country sourcing </li></ul></ul><ul><ul><li>Outsourcing & off-shoring </li></ul></ul><ul><ul><li>Growth in Third Party Logistics </li></ul></ul><ul><li>Disasters </li></ul><ul><ul><li>Natural disasters </li></ul></ul><ul><ul><li>Supply Chain disruptions </li></ul></ul>
    11. 11. … and Some New Issues <ul><li>Security & Legislation </li></ul><ul><ul><li>Increased scrutiny </li></ul></ul><ul><ul><li>Increased regulation and compliance burden </li></ul></ul><ul><ul><li>Uncertain liability </li></ul></ul><ul><li>Sustainability </li></ul><ul><ul><li>Reduction of Hazardous waste legislation </li></ul></ul><ul><ul><li>Recognition of “global warming” </li></ul></ul><ul><li>Critical Infrastructure </li></ul><ul><ul><li>West Coast Ports </li></ul></ul><ul><ul><li>Truck driver shortages </li></ul></ul>
    12. 12. Three Truths For This Century <ul><li>You Only Know What You Know, No More, No Less </li></ul><ul><li>You Can’t Mitigate All Uncertainty </li></ul><ul><li>Do The Right Things, Do Them Right </li></ul>
    13. 13. What To Do? <ul><li>Check Your Alignment </li></ul><ul><li>With Your Company’s Value Proposition </li></ul><ul><li>With Your Company’s Agenda </li></ul><ul><li>With Your Partners </li></ul><ul><li>With Your People </li></ul><ul><li>Articulate Your Contribution </li></ul><ul><li>What Have I Done For You Lately? </li></ul><ul><li>What Is My Core Purpose? </li></ul><ul><li>What Else Should You Come To Me For? </li></ul><ul><li>Here’s How We Can Do What You Are Trying To Achieve </li></ul><ul><li>Make It Happen </li></ul><ul><li>Event Management </li></ul><ul><li>SLA’s & KPIs </li></ul><ul><li>Staff & Partner Alignment </li></ul>
    14. 14. Our Challenge…….. It will not be easy, but . . . Supply Chain people can make it happen! KPMG’s Operations Cost Management helps clients align the right goods and services in the right place at the right time, at the right terms- at every stage of the supply chain.