Interview: Rating supply chain's leading companies with AT Kearney
AT Kearney’s recent Kearney ‘Mobilising for Supply Chain Excellence’ report found less than one in ten companies could be considered supply chain leaders, with many more toiling away for little or no return.
Supply chain leaders and executives that are failing to excel in the area of external spending – which typically makes up 30% of revenues for service companies and half of revenues for manufacturing firms – could be driving their firms into the clutches of its completion or even onto the business scrapheap.
That’s the verdict from a recent study by AT Kearney ‘Mobilising for Supply Chain Excellence’ found that just 7% of companies can be considered to "demonstrate excellent supply chain capabilities", delivering around $13 for every $1 spent on supply chain management assets.
At the other end of the scale, more than a quarter (27%) of firms are barely covering their costs, returning $1 or less for every $1 spent on supply chain management assets. Between the two ends of the spectrum, 55% - dubbed ‘the pack’ are adding value, but not transforming fast enough, while 11% are producing solid results and are making significant strides to becoming leaders.
Speaking to Supply Chain Digital, Mike Hales, a partner in A.T. Kearney's Operations Practice and one of the report’s authors says that teams and execs that have proven the value of efficient, effective and innovative procurement operations have found themselves catapulted into rarefied air in the world of business, leaving their struggling counterparts in the distance.
“It used to be that purchasing was purely a clerical transactional thing, and for some companies it's really advanced to being a strategic function where the head of procurement directly reports to the CEO – they've got a seat at the executive table. But for the majority of the companies, they just haven't really grabbed a hold of the potential,” he comments.
“It's really hard to be great if you're not excellent at managing your largest cost. It's like competing with both arms tied behind your back. When you look at that last quarter (27%) of companies, they’re don't even pay for themselves, they’re returning a dollar or less a value for the dollar they cost the organisation. So, they could disappear and it wouldn’t impact the company’s bottom line in a negative way.
“If you really want to be successful as a company, you have to be great in this area because it will drive your EBIT, you P&L which will drive your share price It can impact your earnings per share, your working capital, and so on.”
Whereas in some industry sectors, the secret to success can be a challenging puzzle to solve, AT Kearney’s study found that the leading companies shared a number of common synergies: building and managing high-performance teams; managing categories; and managing suppliers.
Hales continues: “We found that three-quarters of the leaders were able to move 70% of their employees that were in the procurement group from transactional to strategic activities. Most of the typically position 30% of their procurement team on strategic and 70% still stuck in transactional and tactical activities. That’s a really important benchmark for companies to aspire to.”
The report found that the leading lights have embraced digital technology to automate away some of the labour intensive transactional activities, freeing up their best procurement experts to work on strategy and work towards integrating emerging technology into their day-to-day operations.
Hales reveals: “We made an effort this time to identify a range of hot topics or emerging investment areas for companies that would try to understand whether companies were going to do anything about block chain, and if they were what level of resourcing were they going to put against it. So again, we were able to show that the leaders were like two or three times more likely to be investing and putting resources and expecting a high impact in those areas that were going to lean more to innovation and understanding the impact of technology on procurement and their enterprise. Those companies clearly have a very forward-looking view.
Continuing the theme, Hales comments: “So many procurement groups still think their mission is done when they get a contract signed. But the leaders realise that they need to monetise and improve that full life cycle with the supplier. Not just sign the contract, but then making sure to get compliance to it, and then driving a value beyond what you signed up in the contract because the contracts just represent the minimum of what you want from that agreement.
“Three years from now the leaders are expecting innovation to be a more important performance metric within the cost. So currently, cost is more important than innovation, but three years from now, most of the leaders are saying innovation is going to be more important than cost. And you're only going to get that if you find a way to work with suppliers. You can't compete your way to innovation with the suppliers because you won't have that trust.”
In addition, those companies struggling to provide return on their supply chain spend could become targets for acquisitionally-minded competitors or private equity firms, Hales says.
“There is a lot of private equity activity and mergers and acquisition (M&A) going on; companies that don’t improve that ratio are likely to be on the wrong end of some of those deals,” he comments.
“We see the role of procurement soaring in the M&A area because it’s a unique opportunity to combine strands of companies and take them to market in a shortened period of time. Part of the playbook of private equity firms is invest in strategic sourcing as soon as they’ve bought a company. It’s a really quick win for them.”
The best way for CPOs in companies with under-performing procurement operations to drive change is to attempt to prove the returns that can be achieved to their CEOs and CFOs, Hales adds.
“Companies in that lower quartile are not intentionally hurting themselves, it’s just that the leadership is not prioritising procurement enough,” he says.
“The path for them [CPOs] is to find a way carry out a focused strategic sourcing programme to really demonstrate that they can return more than $1 for every $1 spent. Once that is proven, they can begin to implement a real step-change.”
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”