Procurement Integrity Breach – A Sure-fire Way to Get Fired

The following story is true; no names or companies will be mentioned.

“Hello, Rebecca. Great to hear from you this morning. What can I do for you today?” I said to my direct report on my cell phone.

“We have a situation that needs your attention.” Her voice foretold that this was one to pay extra attention to.

“What’s up?”

“I just got a call from corporate security. They are investigating three people in our company, two in our organization, for fraud and embezzlement of a supplier.” I was really sitting up tall now and turned away from the computer completely with a pen and piece of paper. “Please, go on.”

The details were still a bit sketchy but pointed to a serious breach of our business conduct guidelines. Security needed our support to do the full investigation. It was a no-brainer and we both agreed to proceed at full speed. I called my boss to provide what we knew and that I’d keep him aware.

The day had taken a turn for the worse. I was shaken by the reality that our people, our trusted procurement professionals, were being implicated for fraudulent behavior towards our suppliers. Is there anything worse than cheating your suppliers as a procurement professional?

 

The Most Fundamental Attribute of Procurement – Honesty & Integrity

The supplier-procurement relationship is the cornerstone of the engagement between two companies doing commerce with one another. A formal supplier relationship management process is the tool for managing collaborative relationships with suppliers to achieve the required business objectives and overall supply chain strategy. The most fundamental attribute of this relationship is a foundation of honesty and integrity between the two parties.

Suppliers engage with procurement in negotiations continually, sometimes formally during periodic pricing reviews, during requests for quotes, when issues arise that need to be addressed, and more. Both parties are always pushing for the best position they can achieve. To make this work, both sides must have the baseline assumption that each are being open and honest with one another.

Without honesty and integrity between the two organizations, the relationship will never achieve what it is capable of for both sides.

 

Reality Check – The Breakdown 

The story began to unfold. It was a lot worse than we imagined.

At the time, we were introducing new products on a regular basis. Several of the commodity categories were relatively new and suppliers were vying for key positions in our approved supplier list. The procurement team had the challenge of keeping supply available at the right price, quantity, quality, and performance in a highly competitive and dynamic period. Additionally, they had to continue looking forward for the next-best products. This meant a close relationship with engineering to evaluate and qualify the products and suppliers.

This is where it got out of hand.

The three people representing our company were working with one supplier that was very close to getting onto our approved list. If the supplier succeeded, their revenue might be a couple of million dollars per year and an opportunity to grow further with us.

The supplier was very hungry for our business. The procurement and engineering teams knew this. Somewhere along the line it broke down and segued to an unacceptable point – fraudulent behavior and attempting to embezzle the supplier. They crossed a line that sealed their fate with our company and broke every code of business ethics in the industry.

The three forced the supplier to hold “business meetings” at seedy establishments, take them out to extravagant and expensive dinners, and requested money / stock grants to elevate the supplier’s position on the qualification list if they played along. It went way too far and, thankfully, the supplier called our ethics hotline.

 

Conclusion

As the investigation proceeded, the choice was very clear. Rebecca and I stayed in close touch throughout. My boss told me he’d support our decision once we made it. It did not take us long at all once the final report came out. We decided that the perpetrators would be fired immediately. As it turned out, one of the procurement professionals had recently left, so the other two people were released.

It was our only choice. We knew that and it was quite an easy decision to make.

We knew that the credibility of our organization and the company would be irreparably harmed if we chose any other course of action.

What would happen if the word got out to other suppliers? How fast would the relationships we had worked so hard to develop with our supply base disintegrate? How much would our access to new technology be disrupted? The implications of any other choice were too great.

It was the the most difficult situation I’ve experienced with a supplier. It was also a decision that still resonates to this day.

 

Ethical Procurement Links

Please read the Institute of Supply Management’s Ethics and Business Conduct or Chartered Institute of Procurement & Supply’s and National Institute of Governmental Purchasing’s Ethical Procurement code.

 

What are your thoughts about this subject? Have you ever experienced this blatant of a situation in a supplier-procurement engagement?

 

ciao…mam

Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.

 

Other articles by Michael

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6 Essential Attributes of Strategic Supplier Partnerships

Though the phrase partnership is often used, what really constitutes a strategic supplier partnership?

In a previous article about supplier management, I suggested that the more a supplier tells you that they are strategic, the less they really are. Strategic is a term that is often overused. Whether the phrase refers to sourcing, procurement, relationships, or other matters, its use is prevalent.

The notion of partnerships is equally ubiquitous and similarly both mis- and over-used. This article will identify a taxonomy for a strategic partnership between two parties.

What are the essential attributes of a true partnership between a supplier and their customer/partner? Let’s start with a simple framework for the stratification of a supply base and then explore the attributes of the partnership segment.

Based on my earlier post about supplier relationship management, I introduced a three-tiered model for segmenting and managing suppliers.

  1. Strategic Partner – strategic, long-term relationship
  2. Preferred Supplier – operational, on-going relationship
  3. Approved Supplier (aka, Vendor) – tactical, transactional relationship

Vendor is the most commonly used term to define the entire spectrum of suppliers. A vendor is the most tactical of suppliers. They supply goods and/or services that are readily available, are commodities, and price rules.

A preferred supplier has a longer-term, more intimate relationship with the customer. This category of supplier earns the right to sell through a disciplined evaluation and selection process (RFP or RFQ). The relationship between the preferred supplier and customer is deeper than that of the vendor level. Supplier performance measurements are tracked and are the cornerstone of the longer term relationship.

The strategic partner is the most far-reaching relationship of all three levels. Of course, not all strategic suppliers become partners. The strategic partner occupies the elite position at the top of the supply base hierarchy. Partnerships develop over time with conscientious effort on both sides of the relationship. There must be a multi-faceted commitment between the companies to establish the requisite foundation for the relationship to be mutually productive and valuable. Strategic partners may be the fewest in number but they are the most critical to the success of the buying organization. Ideally, both parties have this perspective.

The baseline metrics for performance of a partner are the same operational parameters used for other suppliers. The partnership relationship compels the need for additional attributes to be evaluated between the two companies, including the relationship itself. This enhanced scope is crucial because both companies have significant financial and strategic business ties. This commands a more holistic set of criteria to assess the total partnership.

 

Defining a Strategic Partnership

Let’s introduce the following traits to categorize the multiple facets of a strategic partnership: vision, strategy, investment, planning and management systems, communications, risk, and reward. This forms the expanded domain for developing and maintaining a strong and viable partnership. In fact, each facet must also be “shared” between the parties to truly reflect the nature of this more intimate relationship.

Let’s look at each component in more detail.

 

Shared Vision & Strategy

The most fundamental aspect of a relationship between two companies is the vision both have for their businesses. These visions of what it takes to be successful in their respective markets must align or overlap to ensure that the partnership can develop and remain strong. The relationship must embrace the strategic plans of each entity or it will suffer under the stress of everyday business.

One example is in the world of out-sourced software development. For a relationship between two partners to be viable and value-generating, there must be a clear understanding about intellectual property ownership, market exclusivity, and more. If the partner who performs the work on behalf of the customer attempts to parlay the work they are paid to do into their own market entry, it would undermine the relationship completely. The shared vision and strategy in this example is one where access to valuable intellectual skills is required by one party to be successful and offered by another. From the other vantage point, skills to complement the core investment by the buyer are essential for market success.

Shared Investment

There is money to be spent to bring new products or capabilities to market. Success will be contingent upon appropriate resource allocation and investment by all involved. This does not mean that the investment amounts are necessarily equal. The financial value received by both companies in this engagement may not be equal either. Regardless, it does require both parties to support the vision, strategy, and plans with the appropriate level of investment in human and financial resources and the commitment to stay the course.

Shared Planning & Management Systems

With both companies approaching their joint activities with alignment at the vision and strategy level, the detailed plans must also be congruent. Plans establish the resources involved, the milestones for the key activities, and responsibilities of both parties. Planning has to be mutual and both parties need to be actively involved and vested with the entire plan. Falling short here will set up misaligned expectations and when issues do surface, the ability to easily resolve them suffers. Regular business reviews are an integral part of a management system. Build them into the relationship plan to ensure alignment at all levels of the business.

Shared Communications

Since a partnership sits atop the supplier hierarchy, a high degree of collaboration is required for the supplier and customer to be successful. This implies a structured and managed approach to communications and engagement across all dimensions of the relationship. Communications will span the management hierarchy and the functional disciplines of both parties. Open, transparent, and strong cross-functional engagement between the partners is as important as the contractual and formal aspects of long-term performance and value contribution. If communications channels are not open and bi-directional, long-term success will be compromised.

Shared Risk

All business ventures have elements of risk. When two companies come together to do business, they are both taking on new and shared risks. Some of these are unique to their business or market and some are shared by the fact that they are collaborating to be successful. It is critical that both parties acknowledge these risks and be transparent with one another. An open, honest engagement will provide the clarity both parties need to deal with risks when they occur without jeopardizing the partnership.

Shared Reward.

Winners beget winners. At the end of the day, success in the marketplace needs to be shared all along the value chain. Supply chains with close, vested, and mutually-beneficial relationships at the highest levels of the supplier hierarchy will succeed the most. Successful partnerships will generate more mutual value than lesser relationships. When set up properly, there is reduced chance of arguing over who got what or not later on. Market share growth, access to technology, improved profits, and other measures are examples of what each party may accrue.

 

The strategic partnership is the pinnacle of supplier relationships and takes a more holistic management approach to be successful. When making decisions about very strategic engagements, consider each of the above elements to ensure that the partner selection is well-founded.

 

Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.

6 Bold and Creative Techniques for Supply Chains to Weather a Stormy Market

What would you have done with your supply chain in 2007 if you knew what was about to transpire in 2008/9?

The Institute of Supply Management (ISM) data shows that the US manufacturing index has been below the break-even level for three consecutive months after thirty nine months of growth. Will the trend continue? If so, how long and will it get worse? Is the slowdown in China going to have a significant impact on the rest of the world? It remains to be seen.

It’s déjà vu all over again and perhaps the third time since the turn of the century for the global economy to tread water and decline. How are companies dealing with this? The least mature organizations will wait and just react – it will be ugly. Leaders have begun to orchestrate their entire value chain and make changes now that will provide buffer during the downs and catapult them out when growth resumes. Existing Gartner clients can read: Gartner’s Demand-driven Value Network Maturity Model.

What role should the Chief Supply Chain Officer (CSCO) or head of supply chain undertake to stay ahead of the storm?

 

IBM

The Great Depression of the 1930s presented an “unprecedented economic challenge, and Thomas Watson, Chairman of IBM, met the challenge head on, continuing to invest in people, manufacturing, and technological innovation despite the difficult economic times. Rather than reduce staff, he hired additional employees … – not just salesmen … but engineers too.” (Wikipedia)

The trajectory that IBM had after World War II catapulted them ahead of the rest of the industry. It took many technology disruptions, including one that IBM created themselves, and nearly 50 years for IBM to relinquish its position as the world’s most dominant technology company.

What lesson does this provide for supply chain organizations today? Does the IBM approach to difficult economic times suggest an alternative universe of solutions? Was Thomas Watson the first Mode 2 Jedi?

At Gartner, we use the concept of a bimodal supply chain to distinguish between the daily operations of a business from the more strategic view of the future. “Mode 1” is defined as traditional state of supply chain and the everyday drill of cost reductions, delivery performance improvements, and the usual culprits of operational performance. “Mode 2” is an exploratory state, driven by innovative approaches, changes in the market, growth opportunities, and new models of business that impact supply chains. Watson was clearly in a Mode 2 conviction after the stock market crash. “Damn the torpedoes, full speed ahead!” (Admiral David Farragut). Existing Gartner clients can read: Gartner’s Disrupt or Be Disrupted – Defining the Bimodal Supply Chain.

 

Risk / Reward

Too often we’ve seen dramatically poor forecasts. While forecast accuracy is an interesting concept, when it comes to market dynamics, we have to consider whether we are inclined to bias ourselves more towards the positive and hit the gas pedal when it appears as the sky is the limit. And, do we tend to shrug off downward projections without understanding the real implications of such a laissez-faire attitude? In either case, betting wrong has impacts.

Usually, if we do not appropriately anticipate and prepare for a downward trend, the typical after-the-fact response is the venerable Mode 1 stereotype: cut people, stop all discretionary spending, and slam on the brakes. It’s a no holds-barred knee-jerk response. Who has not been there before?

How would we have dealt with the most recent market collapse in 2008-2009 if we knew in 2007 that it was coming? We only get one attempt at each challenge, what can we learn about the past that can be applied going forward?

 

Think Advanced Maturity and Mode 2! 6 Steps to Success

The typical supply chain response to a downturn is to shut down factories, layoff production workers, cut orders on all suppliers, shut down future-focused improvement activities, etc. This approach impacts the ability to grow in the future.

What if we approached this differently? Does the lesson of IBM in the 1930s offer us a window to view an alternative scheme? Proactive strategies fall into the realm of “an ounce of prevention is worth a pound of cure.”

  1. Let’s start with talent. Watson hired well ahead of the curve in the 1930s. While admirable in the 20-20 hindsight view it is not always possible. CSCO’s should approach a potential downturn as an opportunity to retool the organization and to acquire skills that the supply chain knows it will need in the future. Instead of purely reacting to the “cut 10% of the HC” directive from the CFO, have a plan in place to retool the organization.

Downturns usually unleash a wave of excellent talent available to the market. Be prepared to reduce your team by more than the 10% target and then begin the acquisition plan once the dust has settled. The CEO and CFO will applaud the forward-thinking. In their eyes, you will still achieve the cost reduction targets but be in a much better position to accelerate when the upward trajectory resumes.

  1. Do you know where your supply and demand is? If you are a mature organization with strong supply chain analytics capability, you clearly do. If not, you are driving somewhat blind, looking back at what has been accomplished but with no sense of what is coming. Don’t wait to start because it will be too late.

Why not partner up with the IT team immediately and seek out some critical target areas for better information and analytics to support your supply decisions. Regardless of your areas of strength or weakness, diving in now before you are asked to change will put the CSCO in the driver’s seat in advance of any challenges for the typical Mode 1 “cut headcount, shut down factories, etc.” request later on.

  1. Don’t wait until there is no choice and be forced to shut down factories and lay off employees. With a strong S&OP process in hand, CSCO’s can begin to evaluate how to reset manufacturing earlier as signals begin to drop. Instead of all-in reductions in work force after the fact, production shifts can be slowly reduced ahead of time without impacting key performance metrics, especially customer service and cost – as they lead to major exposures in revenue and margin. Existing Gartner clients can read: Gartner’s Hierarchy of Supply Chain Metrics.
  2. What downturn has not been met without asking your supply base to do something? The usual suspects come to mind: take back inventory, delay and cancel purchase orders, extend payment terms, cut prices, and compromise well-nurtured supplier relationships. These are all so typical in their Mode 1 demeanor. We can be much better than that. Key suppliers should be viewed as partners – this changes the entire dynamic when challenges arise.

The CSCO or CPO knows that the suppliers see the same avalanche coming their way. There is no better time to dust off the supplier relationship program and evaluate the entire supply base than beforehand. Who is performing very well (cost, quality, delivery, innovation)? Is it possible to shift more supply to these top-performers, especially in multi-sourced categories now? Have we lived with 3 or more suppliers in certain categories when, in reality, 2 is sufficient? It is very important to consider the myriad options ahead of time than to be stuck with a limited, mode 1 playbook later on.

  1. Risky Business! Yes, there is always the issue of risk with a more consolidated supply base, but what is more important now – cost optimization or overall risk? When we talk about risk-making and decisions, the CSCO must know what she is getting into. By understanding what data and intelligence exist about past downturns, the CSCO and CPO can make informed, low-risk decisions today instead executing a reactive response tomorrow.

Engaging top suppliers early demonstrates the trust and confidence the supply team has and creates enduring goodwill. Mutually advantageous strategies can be developed and called into action at the right time. We may be wrong about the projected situation but one might argue you’ll be better off by taking a Mode 2 approach. It’s only bad risk when you have no data or experience to judge with.

  1. You’re not alone in this – what opportunities are lurking? Take advantage of this and realize there are a number of ways for you to do so. First, you have colleagues in the same impending mess as you. Sharing experience and issues allows you to test ideas and find out from others what is or isn’t working for them. Gartner’s exclusive network of diverse and experienced supply chain executives provides an excellent opportunity to talk to someone who understands. Peer networking continues to be the most sought-after element of a CSCO’s repertoire with Gartner.

Next, look ahead of you in your value chain – you will see are customers in the same predicament. A truly orchestrated supply and value chain means that these upstream conversations already occur naturally and are an important facet of everyday supply chain engagement. Ask them about what they see, what they are considering and, you’ll find ideas to help key parts of your supply chain be ready in a holistic manner.

 

Check your mode, now.

Are you thinking ahead and considering innovative and unique ways to persevere through difficult times working out scenarios of what might be? How will you be prepared to respond? Will you wait before you plan on a response tactic? Or, will you lead the charge and start now – ready to pounce on the opportunities that will present themselves while the rest of the pack gets washed ashore? What knowledge assets do you have at your disposal to test ideas against?

 If you are interested in learning more, please go to Gartner’s Supply Chain page or contact me via LinkedIn.

 

If we don’t learn from our past, we are bound to repeat the same mistakes over again.

Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.

The Snowy Big Data Supply Chain Event of January 2016

Prolog:

Did you see it coming? Sometime during the droning sound of The Weather Channel announcers describing Winter Storm Jonas I realized, “Holy cow! There is a gigantic big data event going on.” Not just gigantically big, but galaxy-like big.

How much snow was going to fall? What will the distribution of snow depth be? What is our projected absolute error range? How many plows do we need? Where? What is their capacity? Do we have enough fuel in all of the stations in the target range? Where will the snow all go? Can we calculate which roadways should be cleared first in the city so that assets can be deployed early and be ready (the grid of Manhattan has to be very easy to optimize)? And so on. We just need all of the data.

While the people in the target story zone were fretting over bread and milk, the folks in Buffalo, Syracuse, and Rochester were saying “Let’s get some brie, baguettes, smoked meat, and winter lager and watch those folks out East deal with this event!” While many of us remain skeptical about weather forecasts, communities, cities, and governments cannot afford to under-estimate the potential impact. Readiness is paramount.

The amount of “things” required to prepare for and respond to storms or major events is enormous. Some of the things already are part of the data network needed to manage the response. Many elements are not in place yet (for example, distributed sensors informing the agencies about the current state) and should be part of future planning. The more “things” that can provide data, the better agility we’ll have. We all know, the Internet of Things (Iot) is the next Big Thing! Some say it’s bigger than any other next biggest thing. Ever.

Well, we have our history about weather. We have great models that modern-day media love to show off – despite historical accuracy issues (I wish I got paid to be wrong!). We have supply and capacity in place – but how much can we handle?

 

Winter Storm Jonas

The storm that is now in the record books provided a tremendous vehicle to assess the full breadth and depth of what’s capable for IoT experiences that can generate unprecedented volumes of real-time data that are rich with the informational nutrients of how to prepare and respond that are truly transformational to society.

This information is essential to the supply chain part of the discussion. Supply chains thrive on timely, accurate data and information to remain both agile and focused. The supply chain elements are the “things” in the Internet of Things aspect of this big data opportunity.

There are big data lakes everywhere along the infrastructure waiting for deeper analysis: transportation, food & beverage, energy distribution, emergency services, consumption trends, and more. These all need to be mined for the requisite information to determine readiness (historical analysis vs. current capacity) and deploy the assets (snow trucks, salt, sand, water, emergency services) when needed – even days ahead! Supply planning starts with historical data about consumption rates and performance and the impending storm event.

“Data is the new science. Big Data holds the answers. Are you asking the right questions?” Patrick P. Gelsinger, Senior High Technology Executive

At one point on TV, one official said “We cannot handle snow above 3 inches per hour!” That’s the capacity of the current system. Is there additional flexible capacity nearby that could have been deployed much earlier? How much more is actually needed? If we moved all of the cars out of the roadways earlier, would our plowing efficiency go up and increase effective capacity? If public officials were given the tools to ensure well-ahead of time that the sufficient supply and capacity was available, the impact of the storms could be measurably less.

If you look at the map above, one can see that areas of the region usually well-prepared and equipped for large snowfalls went un-touched (Great Lakes snow belt, northern New England). Was a formal assessment done to determine if those assets (plows, snow, and emergency crews) were available and mobile enough to help out the storm area? If not, this is an opportunity that the right analytics tools can determine.

Snow in Minnesota

With the right system in place to model and determine what is required, the new demand (projected storm size) is loaded into the supply network and artificial intelligence (AI) tools manipulate the data to suggest likely outcomes. The AI engine(s) recommends a full deployment map of all essential infrastructure (capacity) and consumable assets (supply) based on confidence models from the weather predictions. If there are gaps, the model can reach out to other assets close to the region at risk. Ready. Set. Go!

The models that do the weather predicting (demand generation) will eventually feed the emergency system directly and scenarios played out will look at redistribution of supply (assets) within range (cycle time) in advance of the storm. Back to the things part of this, adaptive sensors throughout the affected area will keep pace with storm accumulation and clearance rates to adjust both capacity and supply – an agile supply chain with real-time data. True, there might be occasional errors of over-commission that leaves assets under-utilized, but we know this is a less risky and costly situation than not having assets in place due to under-forecasting.

With the correct supply, projected demand, and historical consumption data available from the aforementioned things, cities will also be able to know in advance where all transportation assets (planes, trains, and automobiles) are sitting and which ones need to go get out of Dodge; which ones to stop from coming in; which ones to store; and which ones are needed. Traffic flows can be adjusted to streamline exit paths and security assets (police and/or National Guard) can be sent out to monitor and guide. They will be redeployed later in the day as the snow begins to accumulate and eventually fades into the sunset. Once it is all said and done, everybody goes home, safe and sound.

Why should anyone ever be stranded on a highway again? The entire system in the affected area can be prepared for the event and take preventive action much earlier. While the chances exist that we over-forecast, the alternative is much worse – which we’ve seen many times in the past.

“Get the milk! Get the bread! Get the toilet paper! It’s gonna snow a ton!”

Once the storm and clean-up are over, there will be a brand new set of data available about the entire event, from the original warning to the last bit of snow moved. These data go into the existing pools of data and help set up the supply/capacity response for the next storm. Of course, record storms reset all of the averages and distribution of potential impacts – future events will benefit from the learning achieved. Simulation models will have new parameters to use during the next event’s planning.

Our ability to respond to widespread severe weather events must be proportional to the degree of recovery needed. This may mean that readiness spreads out geographically. With some capabilities (electricity, for example) the risk is higher that a storm can affect millions of people. Do we have the data and information necessary to help assess and plan for the impact of outages? With information such as this, government and private services can be deployed at the right levels and at the right cost.

Until the next biggest weather-driven supply chain event!

The discussion can really go on longer.

What do you think about this?

Well, time to check out The Weather Channel once more before going down for a long winter’s nap. I’m rooting for NYC to beat its all-time record and watch people stranded helplessly on TV. That’s winning, right?

“Let it snow, let it snow, let it snow!” Sammy Cahn (writer)

 

Epilog

After flying successfully from Seattle to New York City’s LaGuardia Airport, the reality of the problem became very evident. Hundreds of people were landing in the NYC airports once the flights were released. Unfortunately, the roads were not quite as ready. Accidents, slow moving traffic, and atypical congestion clogged up the LaGuardia airport late Monday afternoon through the night. Clearly, the incoming traffic exceeded a reasonable level given the overall situation. Busses, shuttles, limos, and taxis could not get through. Rental cars were quite depleted and emergency crews were dealing with the mess. 1 hour and a few dollars later, the driver from Avis accepted my “offer he couldn’t refuse” and took us to the Hertz terminal. Clearly, this is yet another opportunity for minimizing the disruption in this type of event with better data, information, analysis, and integration with the services in the region.

 

Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.

Show Me The Money! Get What You Deserve – Contract or Not

Supplier Remuneration – Sometimes You Just Have to Ask: Recouping Losses Due to Supplier Error Without Strong Contractual Protection

Warranty Handshake

This is a true story about a supplier issue that led to a massive field return issue – but actually improved the relationship. “Why is this an issue?” you might ask. Well, not all supplier relationships are governed by strong, broad-based agreements. Sometimes, without appropriate coverage or protection, especially in a sole-sourced situation, you just have to ask for a remedy and hope for the best.

How did we get to this point? 

The relationship between the supplier and us was solid. The companies worked together long before I arrived. For the most part, things were going well. However, the contract was not up to date and we were not properly protected from mishaps of the supplier.

We bought a specialized system from them to run part of our software. We installed these systems worldwide for our customers as a critical element of our overall solution. As with any purchasing environment, we tracked cost, quality, delivery, technology capability, and response to issues to judge performance. They performed very well.

Then, we discovered the issue.

 

The impact

It was not the type of problem that surfaced during the normal testing and evaluation. In fact, it was serendipitous that we found the issue at all. Once we discovered it, there was no turning back. Due to the nature of the problem, it was inevitable that at some point our customers would experience an unacceptable problem.

The cause of the problem was not the usual bad device or faulty manufacturing process or the rest of the list of hardware hiccups. The supplier had made a change in their manufacturing control system (MRP). During the translation from the old to the new system, the bill-of-material (BOM) got truncated and a number of components in the design never made it into the hardware. Despite that, all of the functional tests passed their processes and ours.

By the time we realized it, we were hundreds of systems, and a few million dollars, into shipments and field installations. Houston, we’ve got a problem.

We had to recall, replace, and repair the systems immediately – it was an “epidemic” situation. The challenge was that replacement had to occur first. We worked through those logistics to ship, replace, return, repair, and then re-ship. Fortunately, the systems were all very new and we could send repaired systems back out as new.

Please

We began the dance to get the supplier to cover the recall and replacement costs. Back and forth between the procurement manager and the account executive at the supplier.

Of course, our CFO was breathing down my neck. “We never get compensated for anything from suppliers. How come we always bear the burden?” Mind you, the contractual situation was inherited.

Regardless, time to negotiate more intensely. I went back and forth with the account executive.

“Look, we did not cause this. In fact, we did nothing wrong. You shipped us bad stuff.”

“Yes, I know. But why should we pay for the overall recovery? We are not obligated. There’s no way our financial executives will allow me to commit anything. We will fix our mistake, but that is it.”

Time to escalate.

Money Handoff

In the end we got our compensation

The escalation call was scheduled. The account exec told me not to expect a miracle or anything different from the financial executive.

The Cliffs Notes version went as follows.

“We have a major recall and repair problem. We are thankful that you are fixing the problems quickly and expediting new material to accelerate the entire process. However, we are spending a couple hundred thousand dollars to execute the entire process. Our customers cannot wait, so we must move fast. The personnel and shipment costs are not cheap.

“Please accommodate us by paying at least half. Thank you.”

Within 15 minutes of the call, the account executive called me back.

“You won’t believe this! Your request was so compelling, honest, and candid that the financial person agreed to compensate you. Congratulations. I never thought this was possible.”

It was even more fun walking down the hall to tell our CFO that we got half of the money back. He was equally ecstatic.

The negotiations and escalation could have gotten heated and hurt the relationship. We could have threatened legal action or changing suppliers. Both of these courses would incur a lot of opportunity cost and wasted effort.

Instead, we just asked and they said “yes.”

ciao…mam

  

Michael A Massetti is a supply chain executive who has managed procurement, quality, supply chain planning, operations engineering, and more. He’s also “gotten the money” when suppliers go awry.

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So, you really enjoy being a supply chain professional? Part 2

Are Demand & Supply Driving Your Supply Chain Crazy?

Let’s face it, supply chain is a fascinating and pressure-filled field. Supply chains deliver the products that customers demand. The concept of a demand-driven supply chain was developed by Gartner (originally by Debra Hofman from AMR Research). It’s a great concept that the entire supply chain be driven by demand. Albeit, what it usually drives is the supply planners crazy. Don’t you wonder sometimes how and why you got into this field?

Through a series of articles and musings, I will share some thoughts through adages, quips, and comics that will look at supply chain with a tongue-in-cheek perspective. I look forward to comments and other perspectives.

This second article will look at the vagaries of demand and the vicissitudes of supply. Future story lines will include supplier management, inventory, supply chain risk, logistics, and managing numbers.

Supply Demand Comic 1 

Demand planning is the art of integrating multiple, independent, and inaccurate signals into one accurate signal.

Demand is the baseline for all things supply. Customers’ desire for a product drives the demand and is the foundation for business volumes. Without demand there is absolutely no need for supply and even less need for supply chain folks.

But, where does the demand signal come from? It’s a question that remains mysterious for supply chain professionals.

Demand planners have a plethora of signals available to them – point-of-sale (POS) data, macro market or economic trends, historic demand accuracy, promotional effects, seasonality, business targets, prior product launches, actual orders, and more. While these are options aplenty, by themselves, none of them are sufficient or accurate.

Shouldn’t demand planners be able to get it right with so many variables available to them?

The reality is that most of these signals are rear-view mirror perspectives. As financial planners say, “past performance may not be indicative of future results.” We all know that if you drive your car by looking solely at the rear-view mirror you will eventually go off of the road. Not a good thing.

While many solutions providers have developed amazing tools and statistical techniques for demand planning, the fundamental problem of keeping demand stable and accurate remains unsolved, at least from the supply planner’s viewpoint.

Could it be that there’s more art to demand planning than anyone wants to acknowledge? So maybe the key is to channel our inner Picasso rather than our inner Newton. Regardless, each cycle, whether weekly, monthly, or otherwise, the demand signal is passed on, like the hot potato it is, to the supply team to work with.

And it’s usually different than the last one submitted. 

Supply Demand Comic 2

Supply planning is the science of delivering that exact signal regardless of how much or often it changes.

The supply planning team has the unenviable job of taking that ever-changing signal and converting it to a very specific plan for their factories to deliver. Reducing the uncertainty in the ability to deliver the products required is of utmost importance.

Supply planners are evaluated on finding the ever elusive perfect balance between the triangle that is forecast accuracy, on-time delivery, and stock levels. What’s your business targets for on-time delivery to your customers? Methinks it is well over 90%. 95%? 98%?

Is that even relevant in this day and age? We’re just being measured on our ability to serve the next link in the demand chain. Want a real headache? Start integrating notions of on-shelf availability one or two levels down the chain.

Factories do not deal with ever-changing requirements very well. Shooting at moving targets is not manufacturing’s core competency. They expect to have clarity and stability to be most productive. Building the same exact products at the same volume every single day keeps factory GMs young, vital, and stress-free.

That’s just not the real world of demand and supply. Enter the necessary evil: Stock.

While the demand may move around a lot, supply has a few tricks up its sleeves to mitigate the variance. Buffer stock of inventory and manufacturing postponement techniques are just two of many tools that the supply side can employ to reduce the effects of demand uncertainty.

Regardless, the never-ending conflict to balance the vagaries of demand with the specificity of supply contributes to the sleep deprivation of supply chain practitioners.

Supply Demand Balance Lever

Balanced supply & demand is a rare event they are actually two mutually exclusive, independent signals that occasionally intersect in time and space.

The assertion remains that demand accuracy is fleeting and changes in the signal are frequent and sometimes severe.

The monthly S&OP was our venue to manage the long-term balance of supply and demand. The cycle commenced with an updated demand signal and the supply team would evaluate inventory, capacity, incoming materials, and any constraints to match supply to the demand.

Imagine a giddy set of supply geeks preparing to tell the CFO, COO, CSO, and other execs that we can support the revenue and demand plan. Yeah, baby!

Then, the sucker punch appears. “Actually, we have changed the demand signal for you to evaluate.” Thud.

I lost count of how many executive S&OP meetings that we would be presenting that seemingly perfectly balanced supply plan with the demand signal from the business when the head of demand would utter that sentence. Are you kidding me?

And you thought that Nadia Comăneci performed miracles on top of that 4” wide padded suede beam!

At a macro level, supply and demand balance is quite achievable. But, we all know that attaining that balance at the micro or SKU level is the Holy Grail of supply planning. In those S&OP meetings, the total supply would easily match the total demand. That said, we’d have a list of angst-inducing shortages accompanied by a list of Little Orphan Annie excess products.

Chasing demand is the never-ending pursuit of supply chain. Sort of like that little puppy going ‘round and ‘round after its tail for minutes on end, only infrequently getting to it.

Balanced SC Metric Chart 001

“Forecast accuracy is the biggest oxymoron in supply chain lexicon.

I’ve often quipped that supply chain personnel typically do not utter the words “forecast” and “accuracy” in the same sentence without including a few other colorful adjectives.

For many, forecast accuracy is seen as the sole responsibility of the demand team. For an organization to truly mature, it needs to be a shared responsibility with marketing, sales and finance. The more the merrier. It may not be more precise, but it does increase the odds of a kumbaya session in the next S&OP meeting.

The numbers tell it all: world class demand planning accuracy is ~80% but you get fired if your supply delivery or manufacturing output accuracy hovers anywhere near 80%.

OK, maybe this stretches it a bit. However, the point is valid. Best-in-class demand planning is typically in the 70% range and supply chains get measured on their ability to reach the “Perfect Order”. I’ve been with companies that have settled for 65% as an “aspirational” target.

What is the cost of poor forecast accuracy? Heck, what’s the cost of 65% forecast accuracy? There are only a few levers available to accommodate a 35% degree of uncertainty – carrying more inventory or reducing service levels are two.

If we take a look at Gartner’s “Hierarchy of Supply Chain Metrics” and modify it ever so slightly, demand accuracy, inventory (instead of supply chain cost), and service level (instead of perfect order) are inextricably linked. If demand accuracy is low, something else has to be traded off. Either you carry more inventory or you risk lower service levels. We all know that both can be detrimental to a business.

No wonder so many of our top-talent supply chain planners moved to the demand side of the business.

ciao…mam

Michael Massetti is a global high-tech supply chain executive who really does enjoy being a supply chain professional! Seriously.

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