Posts tagged supplychain

Cradle-to-Cradle System Design: reflections by Dr. Michael Braungart

 

Wanted to share insights from Dr. Michael Braungart on circular economy. My focus this Spring in post-graduate work is centered on application of circular economy theory in supply chain optimization.

The passage below is from ICR (2007) 7:152–156 – DOI 10.1007/s12146-007-0020-2 – © ICR 2007 Published online: 28 November 2007.

“Our current ‘eco-efficient’ view of sustainability sees materials flowing through the system in one direction only – from input to an output that is either consumed or disposed of in the form of waste. Eco-efficient techniques may be able to minimize the volume, velocity and toxicity of these material flows, but they cannot alter its linear progression ‘from cradle to grave’. While some materials are recycled, this recycling is difficult and brings added costs. The result of such recycling is actually downcycling: a downgrade in material quality which limits its future usability. We need an ‘eco-effective’ perspective to replace this limited and limiting agenda. In eco-effective industrial systems, the material intensity per service unit or ‘waste’ produced by each individual element is irrelevant as long as the materials entering the system are perpetually maintained as usable resources. For example, if the trimmings from the production of textile garments are composed in such a way that they become nutrients for ecological systems, then it doesn’t matter that they are not included in the saleable product. They are not ‘waste’. Even if the material intensity per service unit of the textile mill is astronomically high, it could still be highly eco-effective if its trimmings become productive resources for natural systems. The goal is not to minimize the cradle-to-grave flow of materials, but to generate cyclical cradle-to-cradle ‘metabolic cycles’ that enable materials to maintain their status as resources and accumulate intelligence over time.

Instead of downcycling this approach is all about upcycling. It doesn’t seek to eliminate waste or produce zero emissions. Instead it focuses on maintaining (or upgrading) resource quality and productivity through many cycles of use (and in doing so, it achieves ‘zero waste’ along the way). The difference between the two strategies of cradle-to-grave and cradle-to-cradle are very important. Strategies focused on achieving ‘zero waste’ do not create sustainable cradle-to-cradle cycles. But eco-efficient cradle-to-cradle cycles do achieve zero waste. How they achieve their goals is also different. ‘Zero waste’ cradle-to-grave strategies emphasize volume minimization, reduced consumption, design for repair and durability and design for recycling and reduced toxicity. On the other hand cradle-tocradle strategies design products and industrial processes so that every single one of their ‘outputs’ becomes a nutrient for another system – designed to be re-used – to create a perpetual cycle where resources are either maintained or ‘upcycled’.”

The Social Dilemma of Human Behavior & Sustainable Choices in the Fashion Supply Chain

Introduction

Although the premise of clothing characterizes a rudimentary need (Yawson, Armah, & Pappoe, 2009), the intricacies and system dynamics specific to the fashion industry’s supply chain are far from basic (Amed, Berg, Brantberg, & Hedrich, 2016). The current state of the fashion industry is challenging because factors contributing to its complexities are uncertain and constantly changing (Amed, Berg, Brantberg, & Hedrich, 2016). From the acquisition of raw materials, to manufacturing and distribution for purchase by the consumer, the fashion industry can influence sustainable practices across the global supply chain (Strahle & Muller, 2017).

Sustainability involves changing environmental dynamics that affect dimensions of ecology, economy, socio-politics, and human behavior (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). Research shows an inherent dissension among some fashion consumers (McNeill & Moore, 2015), who “often share a concern for environmental issues even as they indulge in consumer patterns antithetical to ecological best practices” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). An emerging concept in industry is fast fashion, which refers to “low-cost clothing collections that mimic current luxury fashion trends and helps sate deeply held desires among young consumers in the industrialized world for luxury fashion, even as it embodies unsustainability” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012).

Globalization and competition create increased financial and operational pressures in industry to reduce costs (Christopher, Lowson, & Peck, 2004). When paired with growth in human population (Strahle & Muller, 2017), scarcity of natural resources (De Vries, 2013), growth in industry (Amed, Berg, Brantberg, & Hedrich, 2016), advances in technology, consumer trends (Education Bureau, 2017), and human behavior in social dilemmas, the participants in a fashion supply chain may partake in unsustainable business practices (Chan & Wong, 2012). At the intersection of globalization, market competition, fast fashion (Joy, Sherry, Venkatesh, Wang, & Chan, 2012) and sustainability is the social dilemma of fashionable versus durable clothing. This analysis will explore the social dilemma of human behavior and sustainable choices in the fashion supply chain using the context of a pay-off matrix (De Vries, 2013).

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Social Dilemma Assessment

A social dilemma is where interdependent participants face a conflict between the maximizing personal gain and/or a collective interest (Dawes, 1980). As noted by Dr. Robyn Dawes (1980), leading psychologist and researcher, “public goods dilemmas occur when individuals can choose whether to contribute to a common pool that benefits both contributors and non-contributors alike, as long as enough choose to contribute”. Resource dilemmas are slightly different because individuals can decide how much to withdraw for personal use from a common pool that will only be maintained if withdrawals are kept to a minimum (Dawes, 1980). Public goods and resource dilemmas encompass “many of the most critical problems facing humanity, most notably those regarding resource shortages caused by overuse and failures to contribute to the common good” (Shankar & Pavitt, 2002). Moreover, research demonstrates that communication between participants has a significant effect on cooperation rates in these two types of social dilemmas (Shankar & Pavitt, 2002).

Overview of the Pay-Off Matrix

The pay-off matrix offers a way to analyze human behavior in situations of interdependence and conflict (Yawson, Armah, & Pappoe, 2009). As depicted in Figure 1, interdependent positions can range from virtuously cooperative, wherein a gain for one is a gain for the others, to a win-lose competitive position (Dawes, 1980). A decision to maximize individual gain is known as a defecting choice (Dawes, 1980), depicted as “you are the free rider” in Figure 1 (De Vries, 2013). Conversely, a win-win decision (De Vries, 2013) to maximize the gain of the collective is known as a cooperative choice (Dawes, 1980). Furthermore, “at any given decision point individuals receive higher payoffs for making selfish choices than they do making cooperative choices regardless of the choices made by those with whom they interact” (Weber, Kopelman, & Messick, 2004). The cost of the dilemma is that everyone involved receives a lower payoff by making a selfish choice (Dawes, 1980).

 

Figure 1: Pay-Off Matrix in a Social Dilemma (De Vries, 2013)

Pay-Off Matrix Participants in a Fashion Supply Chain

While enduring substantial growth over the past two decades (Strahle & Muller, 2017), the fashion industry has drastically evolved due to retail consolidation, globalization and e-commerce (Amed, Berg, Brantberg, & Hedrich, 2016). It is considered to be one of the most polluting industries in the world (Strahle & Muller, 2017). Industry and trading partners often request for participants to act sustainably (Strahle & Muller, 2017). Participants in a fashion supply chain include suppliers, manufacturers, distributors, retailers, and consumers (Strahle & Muller, 2017).

Theory and Influence in Consumer Fashion Decisions

Martin Christopher, thought leader in supply chain theory and best practice, defines fashion markets as typically exhibiting the following characteristics: short life cycles, high volatility, low predictability and high impulse purchasing (Christopher, Lowson, & Peck, 2004). A key concept in understanding the impulses of consumer purchasing is Maslow’s theory of human motivation (Chan & Wong, 2012). The theory classifies all human efforts as an attempt to fulfill one of five needs (Yawson, Armah, & Pappoe, 2009, p. 951). Figure 2 shows the hierarchical order in which these needs are connected, specifically in decisions that involve buying clothes.

Figure 2: Adaption of Maslow’s Motivational Theory in Fashion-Based Decisions (Yawson, Armah, & Pappoe, 2009, pp. 952-953)

Consumer decisions to purchase fashionable or durable clothing are also influenced by body type, age, family, lifestyle, peers, society, and consumer socialization (Yang, Song, & Song, 2017), or amount of disposable income that allows for considerations of quality and durability (Education Bureau, 2017). Other influences include values from one’s culture, environment, and value orientation (Education Bureau, 2017, p. 16). Lastly, frequency of wear and care instruction (McNeill & Moore, 2015) may influence the need for fashionable, inexpensive, and of lesser quality clothing versus durable clothing (Education Bureau, 2017, pp. 47-51).

Perspectives in the Pay-Off Matrix

Using the interdependent participants in a fashion supply chain, the over-arching perspectives and the decision to cooperate or defect in sustainable practices are shown below in Figure 3.

Figure 3: Pay-Off Matrix in a Fashion Supply Chain (De Vries, 2013)

Cooperate, Cooperate: A Win-Win Solution

When all participants cooperate, all are aligned in sustainable practices (Yang, Song, & Song, 2017). Because all parties benefit from this scenario, resolutions to the conflict are likely to be accepted voluntarily (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). In this scenario, the supplier uses ethical growing conditions, labor practices, and pricing mechanisms that are passed onto the manufacturer (McNeill & Moore, 2015). The product is manufactured with considerations in sustainable design, efficient use of water and energy in textile process, chemical-free treatments, and lean waste reduction (Shankar & Pavitt, 2002). Distributors and retailers respect considerations of packaging waste, energy use in transportation and logistics (Christopher, Lowson, & Peck, 2004) and the ethical treatment of trading partners. Most importantly, the consumer uses sustainable participation across the supply chain to guide purchasing decisions. After purchase, the consumer limits the use of chemical detergents, water and energy use in care, early disposal and landfill waste, and shares the experience with others in his or her circle of influence (Yang, Song, & Song, 2017). The costs of quality and sustainable considerations are shared and accepted by each participant (Jung & Jin, 2014).

Cooperate, Defect

In this scenario, the consumer adheres to sustainable practices while the supplier, manufacturer, distributor, and retailer defect. The consumer receives a small positive individual outcome that is immediate and a large negative collective outcome (the depletion of future resources) is delayed (Shankar & Pavitt, 2002). The defectors receive a higher payoff in the short run no matter what decisions all other individuals make (Dawes, 1980). The result is that the consumers suffers or loses (Dawes, 1980). The defecting choice is known as the “dominant strategy” (Dawes, 1980). Because the dominant strategy produces less preferred outcomes, it is known to be a deficient outcome (Dawes, 1980). The costs of sustainable considerations are born by the consumer and common resource pools (Jung & Jin, 2014).

Defect, Cooperate

In this scenario, the consumer defects and is “a free-rider” (De Vries, 2013), while the supplier, manufacturer, distributor, and retailer adhere to sustainable practices. The consumer pursues individual short-term interest regardless of the impact to common resource pools in the long run (Chan & Wong, 2012). Common pool resources are available to all participants such as air, water, energy, and are increasingly in short supply (Shankar & Pavitt, 2002). When the consumer defects, resources are still available without any personal cost borne. The collective actively participates in aforesaid sustainable practices across the supply chain.

Defect, Defect: The Commons Tragedy

In this scenario called the commons tragedy (De Vries, 2013), all participants in the supply chain defect causing unsustainable outcomes in decision making as depicted in Figure 4. The concept echoes that “open-access common resource pools are exploited until the very last unit as long as someone else pays for it” (De Vries, 2013, p. 390). In a widely cited paper entitled The Tragedy of Commons (1968), the biologist Hardin suggested there is an inherent tendency amongst humans to overexploit such a shared, common, or collective resource” (De Vries, 2013, p. 390). Research related to the commons tragedy “emphasizes the role of factors that may predispose people to take risks in social dilemmas” including aforementioned theory and influence in consumer fashion decisions (Weber, Kopelman, & Messick, 2004). As Figure 4 suggests, participants may differ systematically in the way each arrives at the same decision to defect.

 

Figure 4: Unsustainable Outcomes of Decisions Made by Participants in the Fashion Supply Chain (Strahle & Muller, 2017)

Conclusion

Sustainability and ethical conduct has gained increasing importance in the fashion industry (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). Many fashion companies are focusing on tactical efficiencies, implementing changes to their core operations “from shortening the length of the fashion cycle to integrating sustainable inno­vation into their core product design and manu­facturing processes (Amed, Berg, Brantberg, & Hedrich, 2016). However, although companies realize that trendy, affordable fashion raises sustainable concerns, the pressure to meet consumers demands is still influencing industry behavior (Amed, Berg, Brantberg, & Hedrich, 2016).  As demonstrated in this analysis, sustainable decisions in the textile and fashion industry can be controlled along the supply chain (Strahle & Muller, 2017). Specifically, “retailers are the link between the supplier and the consumers. They could be the ecological gatekeepers and help the relevant partners along the supply chains incorporate sustainability into the business” (Yang, Song, & Song, 2017). While the fashion supply chain and consumers continue to evolve in the progression of whether to make and/or consume fashionable or green products, the challenge to connect and meet “deeper elements of value, such as high ethical standards in sourcing, efficient use of materials, low-impact manufacturing, assembly, and distribution,” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012) will remain challenging for decades to come.

References

Amed, I., Berg, A., Brantberg, L., & Hedrich, S. (2016, December). The State of Fashion. Retrieved October 29, 2017, from McKinsey & Company: https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion

Chan, T., & Wong, C. (2012). The Consumption Side of Sustainable Fashion Supply Chain: Understanding Fashion Consumer Eco‐fashion Consumption Decision. Journal of Fashion Marketing and Management: An International Journal, 16(2), 193-212. doi:10.1108/13612021211222824

Christopher, M., Lowson, R., & Peck, H. (2004). Creating Agile Supply Chains in the Fashion Industry. International Journal of Retail Distribution Management, 32(8), 367-376. doi:10.1108/09590550410546188

Dawes, R. M. (1980). Social Dilemmas. Annual Review of Psychology, 31, 169-193.

De Vries, B. (2013). Sustainability Science. Cambridge: Cambridge University Press.

Education Bureau. (2017, November 13). Consumer Behavior in Clothing Choices and Implications. Retrieved from www.hkedcity.net/res_data/edbltr-te/1-1000/…/2_Consumer_eng_Oct_2011.pdf

Joy, A., Sherry, J., Venkatesh, A., Wang, J., & Chan, R. (2012). Fast Fashion, Sustainability, and the Ethical Appeal of Luxury Brands. Fashion Theory, 16(3), 273-296. doi:10.2752/175174112X13340749707123

Jung, S., & Jin, B. (2014). A Theoretical Investigation of Slow Fashion: Sustainable Future of the Apparel Industry. (D. E. Kempen, Ed.) International Journal of Consumer Studies, 38(5), 510-519. doi:10.1111/ijcs.12127

McNeill, L., & Moore, R. (2015, May). Sustainable Fashion Consumption and the Fast Fashion Conundrum: Fashionable Consumers and Attitudes to Sustainability in Clothing Choice. International Journal of Consumer Studies, 39(3), 212-222. doi:10.1111/ijcs.12169

Shankar, A., & Pavitt, C. (2002, July). Resource and Public Goods Dilemmas: A New Issue for Communication Research. The Review of Communication, 251-272.

Social Dilemma. (n.d.). Retrieved November 7, 2017, from Wikipedia: https://en.wikipedia.org/wiki/Social_dilemma

Strahle, J., & Muller, V. (2017, October 30). Key Aspects of Sustainability in Fashion Retail. Retrieved from Springer Link: https://link.springer.com/chapter/10.1007/978-981-10-2440-5_2

Sustainable Apparel Coalition. (2017, November 7). The Higg Index. Retrieved from Sustainable Apparel Coalition: https://apparelcoalition.org/the-higg-index/

Weber, J. M., Kopelman, S., & Messick, D. M. (2004). A Conceptual Review of Decision Making in Social Dilemmas: Applying a Logic of Appropriateness. 8(3), pp. 281-307.

Yang, S., Song, Y., & Song, S. (2017). Sustainable Retailing in the Fashion Industry: A Systematic Literature Review. Sustainability, 9(7), 1266. doi:10.3390/su9071266

Yawson, D., Armah, F., & Pappoe, A. (2009, November). Enabling Sustainability: Hierarchical Need-Based Framework for Promoting Sustainable Data Infrastructure in Developing Countries. Sustainability, 946-959.

Why Business Can Bridge the Gap to Solve Social Problems

Why do we turn to nonprofits, NGOs and governments to solve society’s biggest problems? Michael Porter admits he’s biased, as a business school professor, but he wants you to hear his case for letting business try to solve massive problems like climate change and access to water. Why? Because when business solves a problem, it makes a profit — which lets that solution grow.

Moving Towards a Circular Economy

When you think about accelerating impacts and long-term solutions to current supply chain challenges that impact the 3P’s (people, planet and profit), we need to adopt and develop sustainable frameworks with a holistic life-cycle perspective. There is a ton of innovation happening in the CPG space (Levi’s, Unilever, PepsiCo, etc.)

Shifting from the current ‘take-make-waste’ linear model to the circular economy is critical for businesses to continue to thrive and meet society’s needs. Waste volumes are projected to increase from 1.3 to 2.2 billion tons by 2025, and with nearly 9 billion consumers on the planet including 3 billion new middle class consumers by 2030. The challenges of addressing waste and meeting increasing demand are unprecedented. Therefore it is imperative businesses continue to re-evaluate raw materials, design, manufacturing, consumption, and end of life to keep materials and products continuously flowing through closed loop systems.

How is your company innovating in product life cycle management from design and inception to sustainable product packaging? How are you personally adopting a sustainable mindset in your home, the daily choices you make as a consumer to move toward a circular economy? The bigger question is how are YOU INFLUENCING this change?

Sourcing Complex Professional Services in a Competitive Supply Chain

 

A Review of GlaxoSmithKline Case Study  

Quality is one of the most important factors for companies in the relationship between suppliers and customers (Ackerman, 2007). It requires integration of processes and data harmonization in a complex, global environment. Critical processes and strong relationships develop mutually beneficial outcomes, trust, strength and competitive advantage. We live in a time where globalization has forced industries to adopt cost efficiency strategies in order to compete. Top-line spend is being scrutinized and the legal industry is no exception to the new normal. In 2012, more than 25% of companies in the U.S. and UK spent over $5 million annually on litigation costs, and among healthcare companies that proportion was estimated to be 30%–40% (Gardner, H., & Silverstein, 2016).

Because professional services have become such a prominent cost of business, executive leadership has pressured the supply chain function to enhance the efficiency of spending. Professional services like legal counsel have historically been defined as too complex to transition to alternative billing arrangements that were ordinarily reserved for predictable, simple items. Complex legal services hinge on quality and explicit expertise that are determined on a case-by-case basis.

This case study examines an organization’s process for introducing competition and alternative billing arrangements for complex professional services using innovative sourcing techniques and Six Sigma methodology to monitor and control performance.  The goal of this analysis is to: 1) evaluate alternative sourcing and the utilization of reverse auctions, 2) examine the successes and gaps of the GlaxoSmithKline (GSK) sourcing and procurement model for legal services, 3) determine if the GSK model can be applied towards other complex services, and 4) recommend improvements using the case study of GlaxoSmithKline: Sourcing Complex Professional Services (Gardner, H., & Silverstein, 2016).

Situation Audit

In recent years, the legal industry has experienced a global paradigm shift in the delivery model for legal services (Kane, 2017). This includes a consolidation among law firms, change in size, culture, and regulatory policies that encourage more competition and new entrants. While legal expertise is a necessary expense of organizations, it is historically viewed as a cost center. The 2008 economic downturn created additional competition among law firms as pressure to reduce costs increased and inadvertently diminished client loyalty. As described in the business case, “the size of the legal services market in the U.S. had increased by 4%–5% annually in the years preceding the economic crisis, it contracted by 3% in 2009” (Gardner & Silverstein, 2016).

In September 2008, the GSK law department appointed a new General Counsel who was a proponent of change and believed that the hourly-rate billing system inherently promotes inefficiency. His goal was simple: to reduce costs while increasing quality and value creation. The department’s focus scaled to include a Global External Legal Relations Team (GELRT) and an Outside Counsel Selection Initiative (OCSI). GELRT moved over three-fifths of outside counsel assignment to value-based fees (VBF) which is an incentive based payment structure that encourages integrity and six sigma efficiency in billing monitored and controlled through defined KPIs. Within 2 years it achieved a savings of nine figures (Silverstein, 2014). The over-arching message was that “if firms are willing to put some ‘skin in the game’ to help us meet cost savings goals” they should be rewarded with the value they provide to GSK (Salopek, 2012).

The focus of OCSI was to leverage best practice in e-Sourcing and Procurement using an e-reverse auction program. Based on case-specific criteria, GSK uses a mini-RFI tool that allows it to view an outside firm’s qualifications for the intended case. GSK Legal can then aggregate KPIs to ascertain the firms’ quality as well as their ability to adhere to VBFs. Additionally, the OCSI reverse auction process or “Sourcing Room,” attempts to neutralize aggressive fee competition among the qualified law firms by elevating value creation and fit per case assignment (Salopek, 2012).

In the context of this analysis, GSK has been served with a complaint wherein “A patient, Catherine Whitmore, died of an aortic aneurysm while on our blood pressure medication,” and the responsive pleading is due in just 20 days; an extension allowing more time to prepare a response is unlikely (Gardner & Silverstein, 2016).  A recently hired attorney must act quickly and within the defined processes adopted by GSK including preparing for a reverse online-auction as part of the OCSI process. Throughout the case and while awaiting responses from the “Sourcing Room”, she questions the purpose, process, integrity, and intended outcomes of GSK’s way of working:

“This system reminds me of buying office supplies or landscaping services. Can it really be applied to a complex legal case like this one? Why can’t we just engage the same firm that we worked with last time? Why would this new system encourage firms to use their best lawyers and ask for less? How could law firms suddenly afford to devote more work from their top brass for less money? Where would all of these savings come from? Even if the reverse-auction system saves money, we are paying it back in increased risk as we sit on our hands and watch our response date inch closer. I thought I’d return as the hero who doles out work, not the villain who pushed the legal industry into online bidding wars.”

Problem Identification

The fundamental questions that must be answered are: 1) does the reverse auction system reduce costs while ensuring quality,  2) what are the risks in using reverse auctions for sourcing and procuring professional services, and 3) can reverse auctions be applied to complex legal cases and yield successful outcomes? To better understand the framework of reverse auctions, the impact of compensation models on cost savings will be examined. This includes the impact on supplier relationships and how GSK’s processes may be applied to other complex services.

Alternatives

  1. Competitive Pressure

The legal industry presents complexities in procurement requiring sophisticated coordination of suppliers based on specialized criteria. Competitive pressures are forcing traditional law firms and corporate legal departments to minimize costs, increase flexibility and expand their in-house capabilities. Participation in legal process outsourcing (LPO) has become vital to controlling costs (Kane, 2017). It transfers the work of attorneys, paralegals and other legal professionals to external suppliers, both onshore and offshore. Therefore, “supplier and customer relationship management processes can enhance or inhibit competition” (Sadikoglu, 2014). Using a more agile e-sourcing and procurement strategy, GSK has achieved price advantages by leveraging a Six Sigma approach to managing costs and quality, and using alternative fee agreements, reverse auctions, and VBF to form value-add partnerships. Within lean constraints and a “buyers market”, GSK must quickly respond to changing market needs with no room for error. Overall efficiency increases because “each firm in the supply chain can maximize its competitive advantage through strategically focused resource allocation” (Christopher, 2011). Lastly, competitive pressure introduces a need for increased awareness and intelligent, real-time information flow.

  1. Operational Pressure

The aforementioned process coordination of procuring firms with highly specialized areas of expertise adds a layer of complexity that makes quality and cost control more difficult. In a time-sensitive environment, using a reverse auction process may contradict the need for greater speed and efficiency. GSK must support powerful mobile devices, software-as-a service, and secure, web-based technology to facilitate its way of working and global infrastructure. Advanced communication solutions that align with the “virtual firm” are becoming increasingly necessary in the legal market (Gehrke, 2007). The efficiency of process management emphasizes activities not results, where “proactive approaches to quality management to reduce variations in the process and improve the quality of the product” comes with a cost (Littlefield, 2012). Balancing the costs of operational efficiency can create pressures for GSK in obtaining quality legal services.

  1. Financial Pressure

The stability of the Pharmaceutical Industry and Financial Institutions can affect the financial health of GSK and its supply chain. Competing in a global environment has forced many companies to closely monitor their suppliers’ economic viability (Littlefield, 2012). GSK depends on timely responsiveness and counsel from suppliers. If in the event firm deadlines are missed due to disruption, GSK is left vulnerable.

Additionally, GSK faces pressure not only to reduce costs, but it must transform the perception of a corporate legal department from a cost center to value-add activity. As the cost of legal services continues to rise, GSK faces pressure to innovate legal delivery models, while closely monitoring their efficiency.  Utilizing e-sourcing and reverse auction techniques can provide “higher cost efficiency, larger scale, and possibly lower financial costs such as borrowing costs and tax rates” (Fishell, 2012). However, setup and ongoing costs, any skilled labor costs, and the total costs of quality and risks should be considered, which may increase GSK’s total costs for legal services.

  1. Regulatory & Ethical Pressures

“Domestic law firms are expanding across borders, collaborating with foreign counsel and forming intercontinental mergers, erasing traditional boundaries on the geographic scope of law practice” (Kane, 2017). Technology and globalization are disrupting the speed at which automation of legal processes and emerging e-sourcing and procurement tools are being adopted to remain competitive.  This exposes GSK to a broader Regulation of the Pharmaceutical Industry and legal sector, including quality and safety, ultimately increasing pressure for the company. As referenced in the case, “new governmental policies favoring deregulation and liberalization, such as the Legal Services Act 2007 in the UK, encouraged more competition in the legal market and provided a new route for consumer complaints about lawyers” (Gardner & Silverstein, 2016). GSK faces ethical pressure by engaging in foreign territories with suppliers that may have differing business practices. Moreover, GSK must have full-disclosure of possible defects in its products, some of which may be unknown at the time of release. The catalyst for the complaint in this case is the possibility that a GSK product contributed or caused a patient’s death. While GSK can use legal contracts to try and shield itself from any financial liability due to product implied guarantees or misuse, it still has a regulatory and ethical obligation to ensure product conformance to protect human life including all costs associated with auditing, monitoring, and ensuring product quality compliance

Critical Issues

A critical component of GSK’s success not only lies in its processes and use of DMAIC, but in its creation of a framework in which institutional change can thrive. This takes leadership, vision, structure, and engagement. Despite the assurance from GSK staff that the OCSI approach drives down costs and improves the quality of work by systematically increasing the rigor in the procurement process, the new attorney insisted on analyzing and comparing the competing firms’ bids. Her uncertainty speaks to the critical issues in this case: 1) organizational leadership in institutional change, 2) the utilization of reverse auctions in complex services, and 3) qualitative analysis of cost savings, supplier value, and risks.

Leadership is a critical component of Sourcing & Procurement because it influences, directs, and manages the resources of a supply chain, ultimately impacting a firm’s profitability. The problem for many organizations is that procurement is often perceived as a tactical function rather than a strategic function. For example, even in the P2P process, procurement professionals begin sourcing after a need has been identified. As quoted by GSK’s new General Counsel in 2008, “Before I came to GSK, legal spend had not been managed centrally, and individual lawyers responsible for the matters often didn’t have budgets. The firms often knew more about what GSK spent with them than GSK knew about what it spent at the firms, so GSK was not leveraging its spending power” (Gardner & Silverstein, 2016).  The transformation of how professional services were managed involved detailed planning and managing through process and KPIs. Resistance to change can make it difficult for organizations to adopt new strategies such as redesigning work processes, adopting new organizational reporting structures or establishing new pricing strategies. In addition, many firms are set in the “we’ve always done it that way” mentality that inhibits creative alternatives to procuring professional services.

Analysis

In the context of sourcing and procuring professional services, the GSK model for strategic action and leadership involved promoting a vision, setting strategies, defining goals, providing direction, and adopting a Six Sigma approach to performance management. A scorecard was thoughtfully crafted for each matter, weighting key firm selection factors including matter-specific credentials, experience in jurisdiction, along with pricing (Salopek, 2012). GSK’s e-reverse auctions involve a competitive bidding process where multiple law firms compete for the same project. This can drive price competition for large-scale legal projects such as mergers and tax filings. While there are risks of collusion and price tampering amongst competing firms, the over-arching mantra is that if the prices are expected to be lower, then firms “need to be increasingly savvy with their resources in order to compete” (Clarke, 2015). GSK viewed reverse auctions as an opportunity to create value and govern productive partnerships, not focus just on price which is seldom representative of total cost. The lowest bid was not always selected (Salopek, 2012).

e-Reverse auctions can be used to source and procure any complex professional service. It takes leadership (aforementioned), framework and process, and robust analytics. Using the GSK model, the RFI tool provided conditions around expertise and quality performance, where suppliers derived clear scope to propose solutions to an expected and known end result. When coupled with performance measures to help drive delivery value, satisfaction, and opportunities for improvement, these internal control mechanisms – by design- minimized mistakes, promoted sound decision making backed by data, and rewarded good performance both within and outside the organization (C.I.P.S., 2017).

By the end of 2011, more than 68 percent of GSK’s external spend was through VBFs, resulting in major savings. “One reason for this success was Dan Troy’s <new General Counsel> tone from the top,” (Salopek, 2012). He backed his VBF directive by connecting the annual bonus objectives of law department personnel to GELRT’s quantifiable cost savings. He also participated in global broadcasts to the Law Department communicating progress toward goals. This level of engagement was crucial to OCSI’s success, where the willing participation of all parties was needed in the e-reverse auction process. Since its launch, 57 OCSI events have been completed to date, resulting in total estimated savings of over $32.6 million when the winning firm’s budget (based on hourly rates) is compared to its final VBF offer, and over $21 million in savings when the winning firm’s initial VBF offer in the Sourcing Room is compared to its final VBF offer. These savings are a subset of overall, even more substantial VBF savings” (Salopek, 2012).

While the qualitative analysis of cost savings appears favorable, one must consider the supplier value and risks in using reverse auctions. The two most commonly voiced criticisms directed against reverse auctions are that they do not support strategic goals and do not encourage long-term supplier engagement.  In fact, many might argue that suppliers do not like them. Typically, reverse auctions are designed for routine or predictable purchases that “feature little collaboration, shorter term contracts, products with common specifications and little complexity, and purchases where there are savings opportunities” (Gehrke, 2007). Some view reverse auctions as transactional in nature and, contrary to GSK’s mindset, highly focused on obtaining favorable pricing where “strategic relationships with suppliers rarely meet these criteria” (Clarke, 2015). However, at some point, particularly in the search for specific know-how and execution, price will cluster and a baseline will emerge. If consistent pricing at market-value is assumed, I’d offer that reverse auctions are the perfect forum to steer focus toward expertise and value-add services. This would, for all intents and purposes, be the perfect marriage for e-sourcing complex services.

Recommendations

This case illustrates a deep-seated challenge for procurement departments: how to strike the subtle balance between quality, cost and managing complexity. GSK considered new ways to generate efficiency by integrating leadership, DfSS processes and rigorous control systems, and by improving the way it leads interaction with global suppliers and trading partners. GSK’s integrated processes ensure quality specifications are met on a per-case basis. With active management, it can assume best practice processes and guarantee a process control system (measure, analyze, improve, monitor, control) and favorable outcomes based on a proven track-record.

Communication and connectivity are a vital component of its strategy. A challenge specific to GSK’s legal department is to maintain its success through the necessary conduit of infrastructure…SRM, CRM, voice, data centers, and connectivity. Before GSK makes this investment, I’d recommend prioritizing where the highest percentage of interaction takes place and where a solution can have impact across multiple areas (cost savings, revenue growth, and increased productivity). For example, GSK can consume communications services on a utility pricing model or proven lower TCO with leasing, deferring a pricey capital investment. This would provide scalability and faster expansion of infrastructure as needed and give GSK advanced communication technology to sustain competitiveness.

GSK leadership should continue to support initiatives with its suppliers that promote teamwork, close internal communication, and developing a cooperative culture that fosters trust and collaboration. As supply chain complexity and off-shore outsourcing continues to increase, the need for visibility will require even more enhanced collaboration and real-time data to measure GSK’s performance. This may be difficult for GSK to achieve because relationships, particularly across global and cultural boundaries, are the most difficult to manage (Fishell, 2012).

Lastly, I’d recommend GSK scale its methodology for all professional services. It should continue to embody procurement best practice as described by the Chartered Institute for Purchasing & Supply where, “The supplier-buyer relationship between supply chain members requires that quality start at the top. That is, it is imperative that company visions, goals and strategies be aligned for the betterment of both companies. Joint projects, shared technology, buyer-supplier councils, and collaborative relationships can enhance the relationship. The end result is a culture of continuous improvement throughout the supply chain, and as a result, a highly effective, competitive one.” (C.I.P.S., 2007)

Conclusion

The sourcing and procurement of complex professional services continues to be an on-going area of development for many organizations. Evolving market demands, the shifting legal marketplace, deregulation, and cost reduction are all contributing to the need for innovative solutions in a digitized world. With increased competition across the legal landscape, utilizing e-reverse auctions is a way to achieve cost savings, but not at the expense of service and value differentiation.  In this fair forum, clients like GSK are empowered with the pricing of legal matters, where previously these decisions were dictated by law firms. Just like globalization of other goods and services, “a ‘buyer’s market’ for legal services is bringing increasing demands from clients,” and forcing the legal firms to evolve into a “more nimble, leaner competitors with greater pressures for efficiency” (Abbott, 2016).

 

References

Abbott, M. (2016, January). Georgetown Law Review: 2016 Report on the State of the Legal Market. Retrieved April 19, 2017, from h https://www.law.georgetown.edu/news/2016-report-on-state-legal-market.cfm

Ackerman, K. (2007).  Relationships for Supply Chain Success. Retrieved April 19, 2017, from http://www.supplychainquarterly.com/topics/Strategy/scq200704book/

Christopher, M. (2011).  Logistics and Supply Chain Management, 4th Edition. Harlow: Pearson Education Limited.

Clarke, P. (2015, June). Reverse Auctions are Here to Stay for Law Firms. Retrieved April 19, 2017, from http http://blogs.findlaw.com/strategist/2015/06/how-to-deal-with-a-competitive-bidding-process.html

Fishell, J. (2012, May 31). Maintain Quality in a Complex Supply Chain With Better Information Management. Retrieved April 22, 2017, from http://www.supplychainbrain.com/content/general-scm/sc-analysis-consulting/single-article-page/article/maintain-quality-in-a-complex-supply-chain-with-better-information-management/

Gardner, H., & Silverstein, S. (2016). GlaxoSmithKline: Sourcing Complex Professional Services. Harvard Business Review, Harvard Business School. 9-414-003.

Gehrke, A. (2007, January). Reverse Auctions: Crusade or Curse? Retrieved April 19, 2017, from http://www.appliedclinicaltrialsonline.com/reverse-auctions-crusade-or-curse

Ideson, P. (2016, May). Crack the Code to the Successful Procurement of Legal Services, with Silvia Hodges Silverstein. Retrieved April 19, 2017, from http://artofprocurement.com/legalservices/

Kane, S. (2017, April). 10 Trends Reshaping the Legal Industry. Retrieved April 19, 2017, from https://www.thebalance.com/trends-reshaping-legal-industry-2164337

Littlefield, M. (2012, April). Supplier Quality Management: A Risk Based Approach. Retrieved April 19, 2017, from http://blog.lnsresearch.com/bid/136869/Supplier-Quality-Management-A-Risk-Based-Approach

Sadikoglu,  E.  (2014). The Effects of Total Quality Management Practices on Performance and the Reasons of the Barriers to TQM Practices. Retrieved April 23, 2017, from https://www.hindawi.com/journals/ads/2014/537605/

Salopek, J. (2012). ACC Value Challenge: Committed Leadership Combined With Technical Innovation. Retrieved April 22, 2017, from https://www.acc.com/valuechallenge/valuechamps/2012champ_profile61.cfm

Silverstein, S. (2014, May). Buyers, Influencers, and Gatekeepers. Retrieved April 20, 2017, from http://www.silviahodges.com/wp-content/uploads/2011/09/2014-NYLJ-Legal-Procurement-.pdf

The Chartered Institute for Purchasing and Supply (2007). Contract Mangement Guide. Retrieved April 22, 2017, from https://www.cips.org/documents/CIPS_KI_Contract%20Management%20Guidev2.pdf

 

 

 

Going Green or Greenwashing?

 

Sustainable, much like organic, is used loosely as a marketing ploy. More often than not, countless companies use a concept called “green-washing.”Green washing is when a company, government or other group promotes green-based environmental initiatives or images but actually operates in a way that is damaging to the environment or in an opposite manner to the goal of the announced initiatives. This can also include misleading customers about the environmental benefits of a product through misleading advertising and unsubstantiated claims.

I use this greenwashing index greenwashingindex.com/about. There are more robust reporting initiatives, but this site is simple and give tips to the basic consumer on how to spot greenwashing and outlines the methodology behind the index. I highly recommend EcoVadis for larger organizations looking to integrate a desktop, cloud-based sustainable compliance solution. EcoVadis operates the first collaborative platform providing Supplier Sustainability Ratings for global supply chains. With a focus on maintaining quality and integrity, EcoVadis has managed to also grown quickly to meet this increasing need. Since its founding in 2007, EcoVadis has become a trusted partner for procurement organizations in more than 150 leading multinationals worldwide including Verizon, Nestlé, Johnson & Johnson, Heineken, Coca-Cola Enterprises, Nokia, L’Oréal, Bayer, Alcatel-Lucent, ING Bank, Air France-KLM, Centrica/British Gas, BASF, and Merck. Combining People, Process and Platform, EcoVadis has developed the industry-leading team, innovative technology, and a unique CSR assessment methodology that covers 150 purchasing categories, 110 countries, and 21 CSR indicators. More than 30,000 companies use EcoVadis to reduce risk, drive innovation and foster transparency and trust between trading partners. EcoVadis is driven by a diverse team of over 300 talented professionals from 40 nationalities committed to a real impact on the environmental and social practices of companies around the world.

Why Leaders Should Rethink a Business Culture in Which Everyone Is Always ‘Busy’

 

Great insights from the Sindell’s/ Source: Why Leaders Should Rethink a Business Culture in Which Everyone Is Always ‘Busy’

Think about your day-to-day interactions in the workplace: Specifically, how do you react to the question, “How are things going?” We bet that, more often than not, your response is, “I’m so busy” — or words to that effect. In fact, society has reached a point at which saying “I’m so busy!” is the standard response and has even become a kind of badge or symbol of importance — “Of course I’m busy; I’m important!” This is not a healthy trend, especially considering how an emphasis on being “busy” has trickled down from company leadership to general staff. Today, all levels are displaying this behavior: Employees who rank lower and earn less are just as fixated as executives on staying busy — or at least appearing to be.

There is some science behind this observation: A March 2017 study published in the Journal of Consumer Research looked at how signaling busyness in the workplace impacts one’s status. The researchers found that in the United States, having leisure time is actually no longer considered prestigious. Instead, that kind of status is achieved only when people are perceived as being overworked and constantly busy.

Clearly, leaders and employees alike need to rethink this mentality.

The fallacy of praising “busyness”

If a company’s culture is plagued with this rewriting of what constitutes status, that organization will suffer. The reason: There are implications for a company culture when its people are obsessed with being busy.

For instance, employees may become run down. Job satisfaction may drop. Turnover may rise. Absenteeism may increase. And, despite the appearance that work is getting done, overall productivity and performance will suffer.

Let’s look at the specifics of what valuing busyness really says about a company’s culture:

Being overworked is rewarded.

For a long time, people who have worked overtime have been viewed as valuable employees. Because of this, people who work long hours are rewarded with promotions and higher pay. But think about the last person at your company who earned a promotion. What was his or her typical day like? Did managers see this individual working late and think, “That’s a great team player”?

Did all those extra hours of work earn this person points toward management’s decision to promote him/her?

Chances are, the answer is yes. While logically it makes sense to reward those who work the hardest, this scenario can lead employees to unnecessarily work themselves to the bone. A Staples 2016 study reflected this risk, reporting that a whopping 40 percent of employees polled said they felt burned-out at work. The top contributing factors that were reported to be causing this burnout were workload, time pressures, manager pressures and not taking breaks.

Not only does burnout damage morale, but it also negatively impacts true productivity and performance.

Time-management skills aren’t considered important.

When leaders maintain a level of busyness, they are more likely to appear overwhelmed. Others then think — validly or not — that those leaders have poor time-management skills.

That’s a problem because leaders who manage their time well handle their workloads and complete tasks efficiently. However, if a company’s culture celebrates the overwhelmed and hurried worker, younger professionals think that those overwhelmed leaders are doing just fine — that time-management skills are not particularly important.

In short, leadership has a direct impact on company culture. So, it’s not enough to just accept the busyness fallacy as the way things should be.

How to reverse this trend

Lead by example. Employees usually respect leaders in their company and follow their behaviors and actions. If companies allow leaders to skip breaks and vacations, employees will do the same. In fact, these people will become work martyrs. They’ll feel guilty for using their PTO and think that they need to show complete dedication to their company and job by refusing to step away.

Unfortunately, this is a common mindset many employees strive for. A survey by Project Time Off found in 2015 that 39 percent of employees surveyed said they wanted to be seen as a work martyr by their boss.

And this is another fallacy. Such employees may build their image by putting in long hours in the office, but that doesn’t mean they’re the most productive or the best employee. Plus, this behavior is linked to dissatisfaction. The Project: Time Off study also revealed that 47 percent of employees surveyed who were unhappy with their jobs and 46 percent of employees who were unhappy with their companies thought that it was actually good for their boss to see them as a work martyr.

Clearly, leaders need to discourage this behavior through “leading by example.” Companies should encourage managers to use their vacation time to get out of the office. That way, employees will see that enjoying their own PTO and taking regular breaks, instead of working longer hours, is the criterion for a good worker.

So, how can leaders lead by example?

Set clear boundaries. If leaders and managers are sending out emails at all hours, then employees will feel pressured to work. It’s hard for employees to understand when they’re truly “off” and when they’re expected to be working.

By setting policies about when managers may email employees, a company shows that it values its employees’ free time. This keeps everyone from feeling overworked or overly busy.

Be aware of remote workers hours. Establishing a work-life balance that is healthy is especially difficult for people who work from home. Because they work in the same place that they experience home life, finding that dividing line between work time and home time requires some direction from leadership.

Make sure remote workers know how long they are expected to work. It can also be helpful to have them track how many hours they put in during the day. That way, they don’t end up working longer than a typical office worker.

Change the conversation. Instead of focusing on being busy, companies should be focusing on getting results. When the shift moves from a cycle in which employees feel continually overwhelmed with “busyness” to one that focuses on results, the conversations change from “I am so overwhelmed” to sharing ideas and improving productivity. Interactions move from “I’ve got to run” to “this is what I am working on; do you have any insight?”

A person who is overwhelmed by busyness should be viewed as having poor time management, delegation and project-management skills. Culturally, when companies move from rewarding busyness to rewarding results, people feel less stressed.

Employees will still be working as hard as they were when they were “busy”; but, now, more expansive conversations and behaviors, plus a mental shift, will have occurred.

And that will mean there’ll be more time for success.

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How to Negotiate with Powerful Suppliers 

 

Sharing insights from Prashant Dedhia who describes how to navigate in supplier relationship management in a global landscape.

Source: How to Negotiate with Powerful Suppliers in Procurement and Supply Chain

Authored by | Prashant Dedhia
In many industries, the balance of power has dramatically shifted from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price.

The shift has come about for various reasons, any or all of which may be in play in a given industry. In some cases, suppliers have eliminated their competitors by driving down costs or developing disruptive technologies. In others, fast-growing demand for inputs has outstripped supply to such a degree that suppliers have been able to charge what they want. In still others, buyers have consolidated demand and forced suppliers’ prices down so far that many suppliers exited the market, giving the remaining few more clout.

Whatever the reason, companies that have gotten into a weak position with suppliers need to approach the situation strategically. They can no longer rely on hard negotiations through their procurement offices. To help with the strategic reappraisal, we’ve developed an analytic framework with four steps, in order of ascending risk. Companies should start by assessing whether they could help the supplier realize value in other contexts. If not, they should consider whether they could change how they buy. They should then look at either acquiring an existing supplier or creating a new one. If all else fails, they must consider playing hardball, which can have a lasting impact on the relationship and is the last resort.

Let’s look at each step in detail.

#1 Bring New Value to Your Supplier

This is the easiest way to redefine your relationship with a powerful supplier. It can rebalance the power equation and turn a purely commercial transaction into a strategic partnership. You can provide new value in several ways. For example:

Be a gateway to new markets.

The quickest and least expensive way to redress a power imbalance is to offer the supplier a market opportunity that is too good to pass up in exchange for price concessions. Finding the right carrot can take some digging. Here’s a case in point: A beverage company was facing annual price hikes from a beverage packaging supplier. It seemed to have no way out; the supplier had patented its manufacturing process, and its pricing was lower than that of other sources.

But as it happened, the buyer was about to enter two large developing markets in which the supplier had tried but failed to gain traction. The procurement manager realized that the company could give the supplier’s products a foothold in those markets. She and her team put their heads together with the marketing team and presented the supplier with an offer that was hard to refuse: In exchange for a 10% price reduction globally, the company would use the supplier’s cans in the new markets.

Reduce the supplier’s risks.

If a company is well placed to help a supplier reduce its price risks, it can demand some concessions in return. For instance, a large chemical company was working with a single, recalcitrant supplier. To produce titanium dioxide it required feedstock manufactured to tight specifications, and only that supplier could meet its needs. When the chemical company tried to increase its order, the supplier claimed to have limited capacity and demanded a price premium.

Given the cyclical nature of the industry, the company surmised that the supplier would jump at the chance to lock in a long-term contract—a commitment other customers lacked the financial strength to make. Procurement worked closely with a team from finance, which created detailed models to determine a price range that would let the supplier generate returns of 15% on invested capital. The supplier agreed to a multiyear contract with prices that would not fluctuate more than 10% annually, and the chemical company got a 10% discount from the original quote.

#2 Change How You Buy

If no opportunities exist to help the supplier create new value, your next best alternative is to change your pattern of demand. Because this strategy can have implications for other parts of your organization, it requires close collaboration with any functions that could be affected. A company can change its demand patterns in three ways, all of which may require intensive data collection and analysis.

Consolidate purchase orders.

This is the least-risky option and the easiest one to implement. It may involve little more than acting on an internal audit of procurement data.

At one aircraft manufacturer, various business units were independently purchasing components from a large supplier, which was doubling or tripling the prices it had originally quoted. The supplier was reaping gross margins of about 20%, whereas the aircraft manufacturers were only 10%. And deliveries were unreliable, which drove up the manufacturer’s overall costs. Individually the business units lacked the power to force a change in behavior. But the unit CEOs got together, consolidated their spending data, and went to the supplier’s top executive with a threat to suspend all purchases unless changes were made. The supplier became far more responsive, cutting prices so that its margins were also about 10% and improving the timeliness of deliveries. Small companies that don’t order through multiple units can form purchase consortiums with other firms in their industry. In 2008 an oligopoly of four suppliers controlled the ATM market in one European country. To counterbalance the group’s power, four banks created a purchasing consortium for ATM parts and maintenance, ultimately cutting their ATM costs by 25%. To succeed, consortiums must align their members’ interests and have the right governance in place. To avoid raising antitrust issues, they should not be too powerful themselves, which means that this approach is best suited to relatively fragmented, competitive industries.

Rethink purchasing bundles.

If a company cannot create large purchasing bundles within product categories or geographies, it should consider purchasing across them. One telecom company dealing with a powerful supplier for a particular component gained price concessions by pointing out that it also bought other components from that supplier—ones it could easily obtain elsewhere. Similarly, a global chemical manufacturer accustomed to buying a key ingredient from two suppliers, one in the United States and one in Europe (and each with a monopoly in its region), announced that it was considering consolidating to a single supplier and began a qualification process to choose which one. By awarding a single global contract, it would have given the winner a toehold in the loser’s monopoly territory. Faced with the threat of competition, each supplier agreed to a 10% discount. At other times the right strategy is to pick apart your existing bundles; this may enable you to create competition among suppliers where none previously existed. When a consumer goods company decided to renegotiate its contract with a powerful information provider that offered an integrated global product and services package, the procurement team quickly realized that it needed to differentiate between data (for which the supplier held a monopoly in some geographies) and analytic services (for which the market was generally competitive). It also decided to negotiate at a country level—enabling suppliers that could cover some but not all geographies to participate. As a result, it obtained savings of 10% on data and 20% on analytics.

Decrease purchase volume.

The third way to alter demand is to shift volume away from a powerful supplier, ideally by switching to a substitute or lower-cost product. The mere threat of this can increase the supplier’s openness to negotiation—but the buyer’s organization needs to stand behind its negotiation team and be willing to revisit what it purchases. Determined to reduce IT costs, one retailer we advised determined that most of its staff members did not need to create documents—they needed only to read them. It was able to eliminate 75% of its office software licenses, replacing them with a lower-cost, read-only alternative.

#3 Create a New Supplier

If options for changing your company’s demand profile aren’t available, you should next explore creating a completely new supply source. Like the first two strategies, this ultimately shifts demand away from powerful suppliers, but it tackles the other side of the equation. It is most likely to be necessary for industries where price negotiations have gone so far as to drive most suppliers out of business, effectively giving the survivors a monopoly. Of course, such drastic action risks alienating your supplier completely and may change your company’s business model. It will also alter the competitive dynamics and perhaps even the structure of your supplier’s industry and your own. For these reasons, it is a risky proposition, but if well executed, it can transform your prospects. There are essentially two options:

Bring in a supplier from an adjacent market.

The easiest way to create a new supplier is to bring in a competitor from an adjacent geography or industry, one that might not otherwise have entered the market. One major airline reduced its food costs and improved quality by enticing a European catering company to enter the U.S. airline-catering market, which had been controlled by two well-entrenched suppliers that were reluctant to lower prices. The new entrant had an innovative, off-premises production model that enabled it to offer higher-quality food at significantly lower prices in exchange for longer-term contracts.

Because the airline would need to give the new supplier a multiyear agreement, the procurement team shared its plans with the airline’s chief operating officer, its head of airport operations, and its head of catering. After aligning these key functions on the strategy, the airline announced that it had awarded its contract at a major U.S. hub to the new entrant. After losing that share of business, one of the established suppliers replaced its management team and took a more collaborative approach with the airline.

Vertically integrate.

If no plausible new suppliers are to hand, consider making yourself the new supplier by investing in the requisite assets and capabilities, possibly in a strategic partnership or joint venture with a company that has some of those assets and capabilities. If you’re lucky, a credible threat to take this action will be sufficient to shift the balance of power, as was the case with a paper company that relied on a regulated utility for electricity.

Unable to secure a better rate from the utility, the company began planning to build its own power plant—and it made sure the utility knew about its plans. It spent nine months finding a location, securing pipeline capacity, getting permits, and partnering with a dryer company that wanted to use the steam that the plant would generate. The strategy worked—the utility agreed to reduce its rates by 40% to prevent the company from building the plant. The danger with this approach, of course, is that your threat to vertically integrate may be called. So before embarking on this option, make sure that the new venture could deliver value that exceeds the investment costs and compensates for the added management attention and the hidden risks and challenges that might arise.

#4 Play Hardball

If everything else fails, canceling all your orders, excluding the supplier from future business, or threatening litigation—or some combination of those actions—may be the only answer, short of going out of business. These are truly tactics of last resort.

A global financial services firm had its back against the wall because it had to reduce costs by $3 billion. To cut IT infrastructure costs, it asked its major hardware supplier for a 10% price decrease. When the supplier refused, the firm’s chief information officer contacted the supplier’s CEO to say that all the supplier’s projects in the company were suspended, effective immediately. Within an hour the supplier was deactivated in the payment system, and the procurement, IT, and development teams were notified that they were no longer to work with it. Faced with the costly loss of existing and upcoming projects, the supplier quickly agreed to the price cut.

Then there’s litigation. In the early 2000s a security company that provided cash transportation services to banks decided to increase its rates by 40%. Because it controlled 70% of the market, its customers had few alternatives. But one bank that faced significant margin pressures wasn’t ready to accept the price hike. To better understand what was driving the increase, it asked to review the security company’s financial statements, which revealed only a 10% cost increase—nothing that would justify the drastic hike.

If all else fails, canceling your orders, suspending future business, or threatening litigation may be the only answer.

The bank took a two-pronged approach. Its chief operating officer met with the COO of the security company to explain that the increase was unacceptable and would undermine their relationship. And the procurement team threatened to join forces with other financial institutions and bring the matter to the attention of the national authorities in charge of restricting monopolies. The security company backed down and instituted a price increase more in line with its cost increase.

As we’ve shown, companies negotiating with powerful suppliers have plenty of ways to redefine the relationship. Whichever option they choose, they need a clear understanding of the problem, an ability to work on it across functions, a willingness to think outside the box, and strong analytical capabilities that can reveal the enterprisewide picture and generate useful insights. It’s also important that senior executives commit to strategic rather than tactical moves. With these elements in place, what had seemed an impossible negotiating task becomes one that is merely challenging.

Author Credit: Petros Paranikas, Grace Puma Whiteford, Bob Tevelson, Dan Belz

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Operations or Supply Chain Excellence?

I’m sharing great insights from Innovation Enterprise via Micha Veen who explains simple tips to master supply chain excellence pinned Operational Innovation.

Source: A Refreshing Innovative Approach To Supply Chain Excellence | Articles | Chief Supply Chain Officer | Innovation Enterprise 

Operational or Supply Chain Excellence has been one of the buzzwords that is often heard around senior Supply Chain Execs. However, is excellence the right terminology, or do we need to rename ‘excellence’?

Due to globalization, continuous creation of new small ‘global’ businesses that can compete with established organizations, leading supply chain organizations have started to look beyond ‘operational excellence’, best-in-class, benchmark data and industry metrics, towards using a combination of their own internal and tailored external relevant data to continuously review, assess, and adopt evolving leading-edge processes, technologies and behaviors to stay ahead in this ever increasing competitive business landscape.

This new approach, named Operational Innovation, has become an effective methodology to deliver transformational impact through the following elements…

Innovative solution design

Instead of spending a lot of time and effort in designing the optimal operational and supply chain solutions, successful organizations focus on creating a solid solution foundation, which is constantly reviewed and improved with cross functional teams to deliver cross-divisional, fit-for-purpose solutions.

Close collaboration

Instead of phased hand-offs between subject matter experts, technology specialists, operational teams, sales, finance, etc., leading innovative supply chain solutions should be created through continuous close collaboration with all impacted process participants at every stage of the supply chain journey.

Use of Robotics and Blockchain Technologies

A recent article (How will manufacturing robotics change in 2017) describes how robotics will change the industry as early as 2017. The article describes how by 2019, 35% of leading companies in logistics, health, utilities, and resources will start implementing robotics to automate their operations. Additionally, supply chain blockchain technology has started to be utilized in supply chain organizations to deliver additional benefits. A recent article describes clearly the impact that Blockchain has on Supply Chain.

End-to-end Solution integration

The key to delivering true Supply Chain Innovation is the manner in which organizations integrate end-to-end processes, technologies, data, and internal vs. external organizational units. Due to the external focus on innovative technologies, many organizations are still only focused on technology integration, but leading businesses have started to explore how different cloud solutions can be integrated across their partners and customers, creating hybrid learning organizational models which go beyond the traditional joint venture organization models.

Continuously generate value

In supply chains it’s crucial to continuously generate value. Through the use of innovative technologies, solution partnerships, operational models, etc. leading supply chain organizations are known to continuously review, adapt and improve their supply chain environment to deliver operational innovation. It allows supply chains to continuously deliver ‘new and improved’ excellence.

In today’s world, Supply Chain Excellence is not enough. There is no ‘end-station’. It’s critical for supply chain organizations to adopt an ongoing innovation journey, which requires people with the right mindset, experience levels, attitude and curiosity to deliver supply chain innovation….

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