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WELLBEING AT WORK BABS OMOTOWA INTERVIEW
SUPPLY BUSINESS
SUPPLYBUSINESS JANUARY 2014
JANUARY 2014 VOLUME 2 NUMBER 1
COMMODITY CONUNDRUM
Do procurement and supply professionals have the skills to manage the impact of increased globalisation on commodity prices? VOLUME 2 NUMBER 1
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BRIEFING
Snake charming
Best of the web
The price of people People are increasingly seen as a business’s best asset and in the current economy, with its skills shortages, it’s never been more important for companies to invest in their workforce. But the return on investment of talent development initiatives can be tricky to measure and this can create a headache for procurement and HR departments. Mark Hodgson asks ‘can you demonstrate a clear return on investment?’ bit.ly/SBROIpeople
‘How’ rather than ‘what’ Supply chain processes have evolved and technological advances have improved the efficiencies of the entire supply chain and the procurement of goods, too. People have more time to focus on strategic issues. Procurement has evolved and professionals have seen their remits grow. But the change isn’t always easy. Peter Garnett analyses why procurement outcomes are more about ‘how’ rather than ‘what’ staff did. bit.ly/SBprocroles
Outsourcing secrets
Photography: Alamy
Major long-term outsourcing is perceived as risky because of the high-profile problems faced by organisations when they are implementing large outsourcing programmes. Buyers have typically approached it with great caution, say Vivek Madan and Rufus Hack. But, supply chain and procurement directors risk disappointing boards given the amount of value they are leaving on the table. bit.ly/SBnextgen
MORE EXCLUSIVE CONTENT AT SUPPLYBUSINESS.COM
Fashion house Gucci has thrown its support behind an initiative to keep pythons out of the handbags, bags and belts supply chain. The Python Conservation Partnership, which is also supported by the Boa & Python Specialist Group (BPSG) and the International Trade Centre, aims to contribute to the conservation of two of the world’s largest snakes, the Reticulated and Burmese pythons. Gucci’s owner, the multi-brand group Kering, has pledged to help the BPSG examine sustainability, transparency, animal welfare and local livelihoods related to the python skin trade. Millions of reptile skins are traded internationally every year, half a million of which are from pythons in South East Asia. The trade in pythons is regulated internationally by the Convention on International Trade in Endangered Species of Wild Fauna and Flora and is consequently subjected to controls at the exporting and importing level. But this has not been enough to halt a growing illegal trade, generating earnings of $1bn per year.
Tool for green tips The Global Environmental Management Initiative is developing a tool focused on supply chain sustainability and the procurement decision-making process. The free, interactive online tool is intended to help companies prioritise supply chain processes and identify ‘hotspot’ processes as well as opportunities for improvement, according to the green business alliance whose members include ConocoPhillips, FedEx, Kraft Foods, Procter & Gamble and Southern Company, among others. The ‘GEMI Supply Chain Sustainability Tool’ (SCS) will be useful to sustainability and purchasing professionals and will link market-oriented sustainability claims, economic input-output (EIO), life-cycle assessment (LCA) results and supply chain sustainability
The Python Conservation Partnership has Gucci’s support in tackling the illegal trade in python skins
CSR UPDATE
STRIVING FOR SUSTAINABILITY performance metrics, GEMI’s chair Neville Dias says. The tools are intended to help companies evaluate external impacts, business risks, opportunities and management plans related to water use and discharge at a specific site or operation. The ‘GEMI LWT for Oil and Gas’ is customised for petroleum companies.
Nestlé recruitment drive for young Nestlé is to create 20,000 positions for young people across Europe over the next three years, a significant number of them in supply chain positions. The ‘Nestlé needs YOUth Initiative’ will offer jobs to 10,000 people under the age of 30 and create 10,000 apprentice positions and traineeships by 2016. European Council president Herman Van Rompuy said the initiative
illustrated the unique role that the private sector could play in helping to resolve Europe’s jobs crisis. All of Nestlé’s European teams will contribute to the initiative – the company will hire 3,000 young people in France, 2,420 in Germany, 1,250 in Spain and 1,080 in Italy over the three-year period. This will include both direct recruitment and apprenticeship/ traineeships positions. All sectors will have roles, providing a range of opportunities in supply chain management, manufacturing, administration, human resources, sales, marketing, finance, engineering and R&D. The initiative will also include a Readiness for Work programme, with career counselling, CV workshops and interview training at schools, colleges and at Nestlé sites.
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THE NEGOTIATOR
MIKE INMAN Want help? Send your questions to editorial@supplybusiness.com n nearly every negotiation workshop someone asks about a perception buyers have of sellers; one best illustrated by an old joke. “How do you know a salesperson is lying? Their mouth is moving.” There is another common perception, whispered behind the backs of buyers everywhere: “Buyers are liars.” So when is it acceptable to be “economical with the truth” and when does enhancing your position become lying? Let’s look at some of the most common situations.
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Omitting information In this first scenario, the decision committee has selected, or has a strong preference for, a supplier and final negotiations are about to begin. If that information were to get in the hands of the favoured seller it would have a significant negative impact on the buying organisation. In this case, I believe withholding the sellers position is appropriate. If pressured by the supplier for information about their standing, without lying a buyer could say: “That information is confidential and is not being shared with any suppliers. At this stage we’re exploring the maximum mutual value.” Or: “You should feel good about your position, without breaking confidence, we will share we have some degree of confidence in you or we wouldn’t be meeting.” If the supplier continues to press, one could respond with: “Every moment we spend on non-core issues is a wasted opportunity, is that really the perception you want us to have of you?” In this second situation, a buyer has been asking suppliers for quotes on a volume of 500,000 units, and the end client delivers an updated forecast with reduced volumes, say 300,000 units? Omitting this is favourable in the short term to the buyer (who will surely get better pricing on 500,000 units than 300,000 units), but potentially devastating to the supplier, who will be left with the same fixed costs, but fewer units to amortize it over. Not to mention potential issues with their own supply chain commitments. In this case “being economical with the truth” has crossed the line into lying. While tempting due to the short term advantage, it is imperative this information is shared as soon as possible with the bidder(s). The
buyer will enhance their credibility with the suppliers, and studies show people who are trusted more have better negotiated outcomes. And a long-term negative consequence (for both) will be avoided.
Using a “Meltonism” A Meltonism is a statement that is 100 per cent true, said in a way that may cause the other side to interpret the statement in a way that favours the person who speaks it. In supply chain speak, a crafty buyer may use a Meltonism to extract an extra concession or to make sure the supplier has proposed the best deal possible. Before formally agreeing to the last round of negotiations, a buyer might say to the supplier: “I’m not ready to agree, I haven’t
“Studies show that people who are trusted more, have better negotiated outcomes”
spoken to your competition yet.” While true, the buyer may or may not have a meeting scheduled with the competition. Most suppliers will certainly assume they do. A weak seller will say: “What else can I give you to close the deal today?” A sophisticated supplier will say: “What is it about the current proposal that would make you want to waste your time with anyone else?”. The first statement concedes value from seller to buyer. The second statement concedes information from buyer to seller. Since a Meltonism is true, I support its use, so long as it doesn’t harm the other side. It’s up to the other side to be smart enough to test their assumptions.
Using misinformation Say you are about to ask a supplier for a concession. Is it acceptable to say, “We are not happy with the situation we are in with you and we are impressed with several of your competitors. If you do not concede to our demands we are prepared to terminate our relationship” (knowing it is an empty threat)? This is the type of statement designed to shift the balance in favour of one side, without regard to the needs of the other side. Using a fabrication like this to get what you want from the other side is a lie, and I strongly suggest you stay away from it. In the short term the buyer will get what they are asking for, but not without long term consequences. If the supplier finds out (they typically do) it was a false threat, it will undermine the credibility of the buyer, erode trust, and the supplier will try to strike back at some point in the future. Adding unknown risk to a sensitive supply is a really bad idea. In general, omissions or statements that help one side without hurting the other, short term or long are at the “economical with the truth” end of the spectrum. Omissions or statements that have the potential to hurt one side, and likely end up hurting the lying side, shift past “enhancing your position” toward the “buyers are liars” end of the spectrum. MIKE INMAN works internationally as a professional negotiation instructor and advisor with TableForce (www.tableforce. com). Previously he was a head of global procurement for MGM Resorts International and IAC/InterActiveCorp JANUARY 2014 SUPPLYBUSINESS 15
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ANALYSIS
STOCK-OUTS
KEEP AHEAD OF THE GAME
CIPS economist John Glen examines the implications of economic recovery, lean supply chains and the cost of stock-outs n my article in the September edition, I outlined the forces that were at play suggesting that economic recovery may be under way in the UK economy. In the intervening three months recovery seems to have taken hold, with growth in the UK economy of 1.6 per cent this year, twice that which was expected by the IMF in April 2013. Furthermore with increased investor and consumer confidence economists are now forecasting growth of close to 3 per cent in 2014. This growth has led to an increase in government tax revenues, most notably VAT and Stamp Duty revenues. At the same time unemployment is falling and employment is increasing and the UK now employs nearly 30 million workers. The budget deficit for the fiscal year ending in March 2014 is now expected to be closer to £105 billion rather than the £120 billion forecast. The chancellor, George Osborne, is now finding out that government deficits are much easier to reduce if you grow an economy rather than relying on austerity measure. So what could possibly go wrong? Let me recount a chat that I had at the end of November with my brother. Once we had finished lamenting the performances of our relative
Photography: Getty, Shutterstock
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football teams we got around to discussing the performance of my brother’s business. He runs a small house-building company, fewer than 100 units per year, in the South West of England. They have had a good year; a combination of government ‘Help to Buy’ and the last three months and ‘funding for lending’ policies starting to ‘allocate’ existing appears to have stimulated the supplies. Furthermore a market and the expectation is conversation with a potential that the favourable trading supplier outside the UK was conditions will continue. So pre-empted with the comment what is the problem? My ‘before we discuss anything the brother is reporting shortages first thing I must say to you is 14 of building materials, weeks (delivery time)’. particularly blocks, in his The economist in me was supply chain. This lack of concerned that his experience inventory in construction might be characterised as an supply chains has led to large ‘outlier’ and sought to gather builders significantly evidence that what he was increasing their buffer stocks, experiencing was prevalent exacerbating the problem. throughout the The net impact of a industry. Evidence growing market and that the ‘panic’ buying in experience of the supply chain shortages in has resulted in my brother’s my brother’s supply chain cement plants closed existing suppliers was more in the last five years increasing prices widespread as the demand for by 10 per cent in was not hard to bricks halved find. In August 2013 Brenda Goh at Reuters was commenting on the shortage of bricks being a limiting factor on the expansion of the UK house building sector. Stephen Stone, the chief executive of house builders Crest Nicholson, was quoted as saying that
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waiting times for bricks and building blocks had extended to three months and he expected it to take four to six months before the supply chain started to respond to the step change in demand. The lack of availability in the house building supply chain is not surprising when you consider the response of building materials suppliers to the post 2008 financial crisis. As Brenda Goh reports, building materials suppliers such as Weinerberger, Michelmarsh, and Hanson (now part of the Heidelburg Cement Group) made their operation much leaner, closing 19 plants in the last five years as the demand for bricks halved. This is all somewhat alarming, but to what extent are the travails of the construction industry indicative of what is happening in supply chains more broadly in economies that are experiencing recovery from the ‘doldrums’ of the last five years? Well, the evidence would appear to be that the lack of inventory in supply chains is widespread. The IMF, see figure 1 (right), have found evidence
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Research has indicated that the lack of inventory in supply chains is widespread
that suggests that levels of inventory globally are significantly below their long run equilibrium levels. This is based on a long run relationship between global retail sales and global production. Effectively, for a given level of retail sales in the global economy the associated level of inventory is significantly below its long run equilibrium level.
There seems to be evidence that the rush to minimise inventory in lean supply chains post the 2008 finance crisis is capable of creating supply chain shortages as economies recover. Given that this potential threat exists, what are the costs associated with stock-outs? Can they be mitigated? In terms of cost of stock-outs we can use the following simple
Figure 1: Change in Global Inventory index 4 3 2 1 0 -1 -2 -3 -4
Q1 2 Q2 00 20 8 Q3 0 2 8 Q4 00 2 8 Q1 008 20 Q2 0 2 9 Q3 00 2 9 Q4 00 20 9 Q1 09 2 Q2 010 2 Q3 010 2 Q4 010 20 Q1 10 2 Q2 011 2 Q3 011 2 Q4 011 20 Q1 11 2 Q2 012 20 Q3 12 2 Q4 012 20 Q1 12 20 13
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Source: IMF world economic outlook April 2013
expression to help our thinking: CSO = (ND x USPD x UP) + CL CSO: Cost of stock out ND: Number of days out of stock USPD: Units sold per day UP: Unit Profit CL: Consequential Loss The cost of stock-out associated with lost sales is relatively straight-forward, that is, the profit associated with units that are not sold due to inability to supply. Consequential losses are associated with production lines that have to stop or slow down due to a lack of materials or sub-assemblies. However, consequential losses also include the impact of stock-outs on current and future demand. There is evidence that stock-outs in one item increase the probability that buyers will not purchase other items in a given buying event. Furthermore, stock-outs reduce future purchases and therefore reduce the lifetime value of customers as is illustrated by the following quote from Anderson et al (2006): “The findings also confirm that stock-outs can adversely impact long-run demand. Customers who experienced a stock-out were less likely to place a subsequent order, ordered fewer items, spent less (revenue), and had a lower subsequent conversion rate. The long-run impact is also large – almost as large in magnitude as the short-run cost.” So what approach should procurement professionals take to ensure that the costs of stock-outs are not incurred as the UK economy recovers? Optimal inventory policies will always seek to trade off the cost of obsolescence, associated with excess inventory, against the opportunity cost of stock-outs, that is, lost sales. Recent economic conditions, in many economies post the financial crisis of 2008, have created an incentive to minimise inventory and reduce the costs associated with obsolete stocks. As the economy
recovers the pendulum swings and the more apparent threat in the supply chain is stockouts, lost sales and the associated consequential loss. Procurement professionals in the next 12 months will increasingly have to draw down on the core competencies of ‘good procurement’. Procurement activities must be aligned with the growth strategies of organisations and face up to the realities of the challenge that such growth strategies present. This in turn needs to translate into business planning processes that are sufficiently flexible to react to a rapidly changing external environment; procurement will be a key to determining the degree of flexibility. The interface between the procurement function and the business will be critical in determining the effectiveness with which rapidly changing strategy and business planning goals are translated into effective procurement practices. Effective communication between procurement and the business will increase the probability that effective performance and governance measures are put in place to ensure that stock-outs are avoided while retaining the benefits of lean supply chains. For many procurement professionals 2014 may mark a return to confronting the problems of expanding economies and increased demand for goods and services. The major challenge will be to retain the benefits of ‘lean’ that have been earned in the difficult times since the 2008 financial crisis while ensuring that supply chain ‘bottlenecks’ do not impede their organisations capability to benefit from growing consumer (customer) demand in recovering economies.
JOHN GLEN is senior lecturer, economics, at Cranfield School of Management and the CIPS economist JANUARY 2014 SUPPLYBUSINESS 25
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COVER STORY COMMODITIES
MAKING THE WORLD GO ROUND
For many commodities the immediate outlook is for a Goldilocks market, one that’s not too hot and not too cold. But don’t get too settled, says Nick Martindale Illustration by F E R N A N D O V O L K E N T O G N I
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ith the global economy finally starting to show signs of a return to sustained growth, demand in many sectors is likely to pick up. For procurement professionals, this will lead to larger buying requirements, not only in components and finished goods but often raw commodities. As proved by the contrasting tales of recent global economic growth and commodity prices however, greater demand does not always result in steeper prices. Caroline Bain, senior commodities
economist at the Economist Intelligence Unit (EIU), points to the normalisation of monetary policy – with the end of liquidity injections in the US in particular – and falling growth levels in China as reasons why prices for many commodities may remain reasonably steady over the coming year. “Many commodities were attractive as an investment because there wasn’t any interest to be got from bonds or stocks and that’s likely to wane over the next couple of years,” she says. “But while China is slowing, urbanisation and industrialisation are continuing, so we might see slower
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OUTSOURCING TIPS
Jim Reed advises on the best way to manage an outsourcing agreement and make a good match, pointing out the pitfalls
HOW TO OUTSOURCE D
uring 14 years in senior procurement roles, most dealing with managed services and outsources, I have worked with every variant of service provision, ranging from PFI (private finance initiative) through managed services, shared services, BPO (business process outsource), transactional outsource and IT service outsource to full-scale mega-deal IT outsource. While there are differences in scope and scale, there are a few common factors with service provision that need to be obsessively dealt with. All of them are common sense and are about being an intelligent, balanced and fair customer. Strangely however, common sense seems often to go out of the window during the outsourcing process.
I can summarise these factors as: Set up the outsource with your eyes open and with extreme care Manage the outsourcer throughout the period of the contract Prepare for exit at the start of the contract and continue to prepare throughout the period of the outsource Exit, renew or retender with care and consideration. When setting out to outsource, be clear that you are ready. Ensure you know what it is you do now. What are the assets on your estate, how much are they worth? How old are they, what problems do they cause, what could you do to fix them and how much would it cost? The same goes for software. How many licences do you have, how are they deployed and importantly can an outsourcer take on
the management of them or does this need further negotiation? I can almost guarantee that however many licences you think you have – you will have many more and they will be worth much more than you estimated. I can also say that some of them will be the wrong type, for the wrong user community and using the wrong volume licence key. Look at your third-party contracts and see whether they can be assigned, novated or used by another party. Have copies of them to hand ready for any due diligence activity. Also try to figure out how well negotiated they are and how they could be improved by an efficient outsourcer’s procurement team – or not. Again you will almost certainly need to renegotiate them – so make sure you do it before you are caught in the trap and lose all of the leverage you have.
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Understand your current performance and whether it meets your users’ needs. Look for the gaps in your performance and how much it is likely to cost to close them. Check your service levels and the service level agreements you have in place. Do they cover all of your services and are they commercial (or are they simply based on how loud you shout)? If they are not commercial make them so, otherwise a bidder will simply make up a price loaded with enough contingency in case of arguments. Above all, understand your current cost of providing the service. When you start the always lengthy contract negotiations think in plain English and make sure you and your team understand why you are agreeing to a position or are putting in place a specific clause. Document the reason behind it as afterwards it will otherwise just be a clause and not an enabler. Identify your experts and work hard to keep them. They will have this knowledge and it is valuable.
Photography: Getty
Managing your supplier Once your outsource agreement is signed there is a tendency to sigh with relief, relax and leave the outsourcer to it. But my experience is that, if you don’t manage your supplier, after a short time during which they try to get sensible answers from you they will manage themselves and shortly after this they will start to manage you. It is important you do manage your service provider, act intelligently, and answer their questions promptly and unambiguously. During the term of the outsource, maintain the knowledge and understanding of the team that negotiated your contract and remember why you agreed a decision. Keep hold of key staff and use your business analysts intelligently to give direction to the supplier. Some clients TUPE across their business analysts with the rest of the IT team. My strong advice is don’t do this. Continue to gather and maintain knowledge about your estate and how it runs. Understand and monitor your technology roadmaps and make sure your outsourcer understands them too. Keep tabs on the software you or the outsourcer has bought and deployed or at least make sure they do. It is very easy for that to get out of sight and a squeezed outsourcer is not incentivised to harvest software when someone leaves – they prefer to buy new and get both revenue and margin. Make sure they are tracking and logging your assets, both hardware and software, and at all times they know that you are properly
licensed and can prove it. As I mentioned before, if you don’t, you will run into trouble and you will have a pile of licences you do not need but may be paying maintenance or subscriptions on. Monitor and streamline the fault response, ticketing and fix processes so that your service is restored as quickly as possible and you learn from any fault and prevent them happening again. Benchmark the service costs and performance and know the gaps between your experience and others. If your service is simple and uses the supplier’s natural processes you shouldn’t be paying more. Watch your supplier closely to make sure they are making money, viable and strong in your line of business, although clearly not too much money. The contract will inevitably end and it can happen for several reasons; natural end of term, change of circumstance or ownership, supplier financial failure,
“IT IS IMPORTANT YOU DO MANAGE YOUR SERVICE PROVIDER – ANSWER QUESTIONS PROMPTLY AND UNAMBIGUOUSLY” material breach or a natural parting of the ways. You need to be ready for exit, however it occurs, whether you are renewing, re-tendering or bringing the work back in-house. Understand your contracts – and the suppliers’ contracts and how your suppliers are behaving. Understand any lock-in or balloon payments to suppliers, including tier-two suppliers and cost them into the business case or you will have a shock later. Identify your key people – work out who holds the knowledge and experience of how your services are configured and how the systems fit together – monitor their likely destinations and work very hard to retain those you really need going forward, otherwise you will end up paying the new outsourcer to straighten it out or even worse, paying the exiting one. Make sure your applications are documented, you have access to the source
code and the supporting narratives of those applications and the product keys, proof of purchase and know your assets: pcs, servers, S/W licenses, their age and any servers, applications and operating systems. Make sure you have put an effective exit plan in place – and have tested it (agree it before you sign the contract). The best example of this I have seen was when the service provider had to deliver the exit documentation, asset lists, contract information, service documentation, applications information and infrastructure diagrams at the end of every year of the contract. This ensured the information was there, the provider was managing the estate and in the event of a fall out with the supplier, you have everything you need to continue. With transparency and cost control, many clients, because of the cost of service transfer or just the opportunity that arises, build financial engineering into their arrangement. They often sell the assets to the outsourcer or gain a financial consideration for awarding the service and pay that back over part or all of the term in the form of additional layers of margin, premium pricing of resources, an uplifted service price or even high-priced consultancy. Often that is accompanied by an ‘all in one’ price that is very hard to unpick to any detail. Either of the above, and particularly the combination, makes it very difficult to work out the true price of service, benchmark with peers, compare with current market pricing or negotiate a simple and understandable price book. My strong advice is do not take on financial engineering but if you do, then make sure you know exactly how it falls to ground and the effect of it. Make sure you can peel it back when benchmarking or market testing and when negotiating a new price book, park the financial engineering and negotiate on raw costs. Also be clear when the need for financial engineering ends, when the loan is paid off and the price can return to a natural actual cost plus margin. It is my experience that this is not always clear, nor is it always signalled. The last thing you need is additional fog. As I said at the beginning, all of this is common sense. However I have seen every point in action and believe me it is much easier to avoid than fix.
JIM REED is director of procurement, University of Nottingham. He was previously at Rolls-Royce as IT sourcing strategy director. Prior to this he held senior procurement and quality assurance roles at Royal Mail and GEC JANUARY 2014 SUPPLYBUSINESS 43
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SECTOR FOCUS One of the biggest challeges for retailers is to combine their customers love of technology with their instore shopping experience
his industry is facing the disappearance of traditional product boundaries and the challenge of incorporating online advances into their overall strategies.
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Strengths Retail is one of the biggest global industries – few people in the world do not shop. In the face of challenging economic conditions, the global retail industry has grown by roughly 5 per cent per annum in the past few years. Building on the rebound in growth that started in 2010, sales topped US$4.271 trillion for the world’s top 250 retailers last year. Characterised by huge polarisation in scale – from multi-nationals to singleton corner shops, retail has had to deal with an unprecedented change in consumer behaviour. We have witnessed the emergence of a whole new generation of digital natives – people who have grown up with broadband and are connected to the internet all the time. The retail industry is still coming to terms with an ongoing consumer revolution. In addition, traditional product boundaries have disappeared – shops sell far wider ranges as they expand their activities. Big retailers have also expanded to take over the supply chain function that was previously controlled by manufacturers. Consultancy PwC notes that “the collision of the virtual and physical worlds is changing consumers’ purchasing behaviours. They are seeking an integrated shopping experience across all channels, and expect retailers to deliver this. Failure to deliver puts retailers at risk of becoming irrelevant.” A key driver of this customer revolution is the rapid adoption of mobile devices, digital media and tablets
Retail needs to take up the benefits of smart technology while still engaging with in-store shoppers. How they do this in today’s shopping environment? Andrew Pring provides a SWOT analysis of the industry equipped with shopping apps. PwC highlights that the number of smartphone users in the US is forecast to rise to 159 million by 2015 from just 82 million in 2010. It adds: “Traditional retailers must find opportunities to seamlessly embed the virtual world into their retail strategy by developing in-store and online technologies that allow them to create and maintain meaningful and sincere connections with customers across all channels.” Retailers survive or fall by their ability to devise new items that attract consumers. Products like iPhones or Kindles create new needs and generate new revenue streams.
Weaknesses Consultancy Deloitte reports that “the traditional bricks-andmortar retail store is no longer the dominant medium for purchasing goods. Instead, it
serves as one of many potential connection points between customers and a retailer’s brand.” An industry observer noted: “While physical stores may have enjoyed the advantage of crafting cool shopping experiences, the aesthetics of the iPad and the social sharing surrounding online shopping today are shifting that advantage to online retailers.” However, many firms are struggling to take advantage of the increasing number of channels available to them for connecting with customers. Further, they are neglecting to make the appropriate investments in technology, operations and talent that would better equip them to seize control of these channels. Retailers’ technology can be disparate and fragmented, and multiple physical locations can drive an unsustainable cost structure that is not flexible and often underperforms. Additionally,
employees often lack the knowledge, training and tools to facilitate a shopping experience that engages customers across channels and extends beyond the traditional shopping experience. As a result, many retailers are falling behind in the race to offer a unique, comprehensive experience with their brand that keeps pace with customers’ ever-evolving attitudes and expectations.
Opportunities Growing computer power and technological developments give retailers deeper insights into consumer behaviour and can leverage greater consumption. Winning retailers are looking to make change the “new
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159m
Predicted number of smartphone users by 2015 in the United States alone
“The market power of the largest retailers and their complex tax arrangements are increasingly unpopular with consumers” normal” in their operating model. By collecting and analysing customer data, the best retailers will adapt to the continuous change that comes with the connected consumer. Says Deloitte: “Information is king, and the use of predictive analytics can help retailers gain deeper insight into the value that is being generated for their customers through their own operating model, and provide them with leading indicators of the
experience desired by the constantly evolving connected consumer.”
Threats As well as an opportunity, the internet is a potential threat to the traditional retail industry. It can reach huge numbers of customers and is a route to the market, which is potentially lower in cost. It means retailers are faced with a wave of disruption and challenges about where they should choose
to invest – in their stores or in their web presence? Experts are forecasting that direct-to-consumer sales will grow exponentially in the next few years, with the change hitting retailers hard. There are also challenges in the clash between corporate demands for more efficient supply chain operations and rising consumer demand for sustainable retailing. Consumers may become more sensitised to issues such as sourcing and
cheap labour and shift away from what are perceived as environmentally unfriendly organisations. Governments may also impose restrictions on foreign investment, which could impede the progress of global retailers. Many countries, including India and Indonesia are looking to increase local sourcing requirements. Some governments are looking to price controls, such as Argentina which has tried to counter high-inflation through price freezes. Additionally, the market power of the largest retailers – and their complex tax arrangements which can minimise government revenue – are increasingly unpopular with consumers. Potential abuses of power with regards to consumers and suppliers may attract legislation and anti-trust moves designed to reduce size. Demographics can affect retailers’ work-forces as well as their consumer base – a shift to an older population will require different logistics/home delivery systems; and also fewer young people will be available for working in-store. On an geo-economic level, the collapse of the Eurozone would precipitate a severe recession, which would have a contagious and negative impact on financial markets, possibly leading to the exhaustion of existing bailout facilities as other countries find it difficult to tap into capital markets. Other sovereign defaults would take place, and the global economy would experience potentially crippling disruption for a number of years. Retailing would be badly hit. A further threat is the growing incidence of increasingly sophisticated cyber theft. An escalation of cyber crime would undermine consumer confidence and throw the progress of the new e-retailing business models off-course. JANUARY 2014 SUPPLYBUSINESS 53
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IUNDERCOVER A N C I D CPO ER The head of procurement at a large global business gives his reflections on corporate life
Legacy leanings attended a host of launches, dinners and fundraisers in the months leading up to Christmas. What I found quite surprising was a common theme running through these events – the idea of leaving a legacy – and not the type where you end up with a bit of Grandma’s cash. I am talking about professionally leaving something for the future of your industry or profession based on the activities you undertake today. I am involved in running a small charity and last month went to a conference on fundraising in the ‘third’ sector, where this ‘Groundhog day’ of legacy discourse started. The president of the Institute of Fundraising described it as a privilege to be changing the world for the people and communities his charity was set up to support. He proffered a real sense of engagement, passion and belief that his fundraising was changing the lives for thousands of people. In his words he was ‘creating a legacy of hope’. At another recent dinner, I listened to the past CIPS president talk in terms of the legacy she hoped her time as president had achieved. The incoming president has a theme similar to ‘pay it forward’, suggesting a more immediate and measurable legacy. The discourse was gaining momentum and I was becoming worried, I didn’t have a legacy – and maybe I should? Shortly afterwards, I was out for (another) dinner, celebrating with a fellow CPO who had recently secured a new role. He started discussing – you guessed it – his legacy! It really does seem to be the vogue thing these days. He talked about “considering your actions in the light of eternity”, I suspected he was misquoting the film Gladiator (which, by the way is brilliant). By now I was becoming paranoid. What was my legacy? I have listened to CIPS CEO David Noble talk about the need for the profession to do the right thing, because of the need to impact supply chains in a positive way, which struck me as a bit more proactive than Google’s informal “don’t be evil” motto. It seems the procurement profession is looking to improve its legacy, not just impacting on the corporate operating and gross margin or on risk mitigation but also to do its bit on saving the world – through supplier codes of conduct, supply chain auditing, supplier social responsibility programmes, anti-slavery and child labour policies. This struck a chord
Illustration: Rob Ball
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with me. Maybe I do have a legacy, which is to use the corporate vehicle I work in, through procurement, to do the right thing? I felt a bit more at peace. This idea of legacy and the power of vision of that legacy reminded me of a story. Three bricklayers are working together, side by side under a hot summer sun. A young child, passing by on his way home from school, stops and questions them. “What are you doing?” he asks. The first bricklayer replies: “I’m laying bricks.” The second bricklayer answers: “Feeding my family.” The third bricklayer is then asked the same question: “I’m building a cathedral,” he responds. A speaker at the recent launch of a procurement executive forum at Cranfield School of Management updated this brick layer analogy for me. “What are you doing,” he asked. “Writing a contract? Saving money? Or building a better business?” It may just be the old chestnut of the value of procurement being redefined – through asking the question: ‘what vision do your procurement people hold – what vision of their legacy do they hold?’ I am reminded of a quote I heard some years ago: “Procurement is about managing a large part of our company we do not own, cannot see and which is staffed by people we don’t employ.” It would seem this definition needs extending to include the question of why? Why do we do all this managing? Because as a profession we are in a unique position to impact supply chains, and if you couple this with a focus and belief that we are changing the lives of thousands of people in these supply chains, then we have a legacy! Perhaps all this legacy discourse is because people essentially want to go to work knowing they’re building something magnificent. Something that simply needs to be built because without it the world would be worse off. And maybe one day I will step back and realise what I have built. I will be able to say I have a legacy.
“What are you doing? Writing a contract? Saving money? Or building a better business?”
AGREE? DISAGREE? Email me at undercovercpo@ supplybusiness.com to share your thoughts
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