Sourcing and Strategy Part 1

One of the most ubiquitous terms that exists in the business world is the term 'Sourcing". Perform a search for the term "Strategic Sourcing" and you will come across a whole multiverse (multiple universes) of related terms, procurement, six sigma, lean, procurement, vendor relationship, risk management, procurement, buyer,  purchasing and my favorite all time, smart buying!Now which HR department dreamed that one up!

It must be that this profession requires a certain degree of schizophrenia! Never has one profession seemed to require a person to wear so many different hats within the same function. But I digress. In this blog, the focus is on strategic sourcing and what it really is as opposed to what a set of HR practitioners have over time decided to call this function and how it sits within the strategic management function of an organization. And therein lies the genesis of the confusion, Traditionally Supply Chain, the organization, as opposed to the function, has been viewed as a cost center and almost always sat within the Finance organization. It's function historically was a fairly straight forward. The engineers in the product team came up with some new gizmo product line but hey someone needs to buy the ball bearings from Tennessee and the 6 inch customized bolts from Illinois so they shot those specs over to the Supply Chain group and let them have at it. And so the sourcing was really a buying or purchasing function with the added stress level of getting discounts for bulk purchases! And if the bolts and bearings would get delivered in 90 days. Well there was Christmas come early!

The just in time model pioneered by among others, Toyota, was really the genesis of the change in the sourcing model and the advent of what may be referred to as strategic sourcing. All of a sudden there was a focus on time, cost, AND quality! TOGETHER! (the horror!) Reduction in inventory and in customer wait times for delivery coupled with an increased focus on quality improvement meant that all of a sudden, Joe the buyer's role took on added significance, a strategic significance, literally a quantum leap from what had hitherto been a purely process function. I will call this stage in the evolution of strategic sourcing, the homo habilis stage.

A majority of companies however failed to grasp the correlation. They focused all the management improvement process in the products and marketing departments but failed to see the correlation between supply chain and strategic goals.  Companies like GE that quickly grasped the competitive advantage that could be gleaned from a sourcing model more aligned with company objectives and that quickly aligned their Supply Chain as such were and have been able to maintain distance over rival competitors for eons. And while most organizations now pay lip service to the notion by having multiple 'strategic sourcing" roles all the way to VP level, it is really very few that have embraced this notion to the industry disruption levels it can be. Granted too that a lot of folks who consider themselves 'sourcing experts" are nothing more than glorified buyers. And the way to easily spot the difference is to ask what the company's five year strategic positioning is. A strategic sourcing manager must be aligned with the organization's development arc to realize any meaningful value. The role is not backward looking or even present looking. It is forward looking!

The CEO

The business of failure

Your business will fail at some point. This is a fact. Now before you get all righteous and argue that your top notch business model, superior management and quality assurance practices are a guarantee of your business’s success , let me illustrate my bold assertion with examples. Apple, General Motors, IBM, Microsoft. Successful businesses you say. No. Businesses that have failed. And because this blog likes to harken to sport metaphors, allow me to add to this a second list of sports clubs. Barcelona, Real Madrid, AC Milan, Chelsea, Arsenal and Manchester United and Bayern Munich. Top European soccer clubs you say. No. Again teams that too have failed. Closer home, I could mention the Indianapolis Colts, the New England Patriots, the Giants and my perennial whipping boys the Washington Redskins as teams that too have failed although I hear you agreeing albeit mutedly with that last one. I will call these type-B Failures.


Now here is a second set of businesses. Bethlehem Steel, America Online, Circuit City and Lehman Brothers. Who you ask. My point exactly. Also failed businesses. To balance it out we can add sports teams too like Leeds United as well as the Redskins (again) and Seattle Supersonics to the list. Failed teams. I will call these Type-A Failures.
 
So, back to my original point. All businesses will fail. My business will fail. Your business will fail. Businesses are run by humans and humans by nature are not infallible. We are prone to mistakes, bad decisions, emotional reactions, aversion to change. A whole lot of predisposition to failure in other words. So the fact is we will make mistakes in business. And ergo our business will fail. However there is a distinct difference between type-A failures and type B-failures as illustrated by the examples above. And the difference is this; type- A failures are fatal. Type-B failures are not. A few years ago Apple was on its death bed. Now it’s a half a trillion enterprise by market share and is successfully churning out superior products at a rate that other companies can only wish for. GM filed for bankruptcy barely 3 years ago and is already turning a healthy profit. And whilst a 2nd place finish for Manchester United and Barcelona read like failures. None can be so bold as to write them out next season.

The key therefore is to structure your business so that the failures that afflict it are type-B failures and not type-A failures. This is where strategy comes into play because strategy drives organizational structure and is the very DNA upon which the business is founded and run. A review of the type-B list failures reveals one common thread. Call it product, branding, marketing, identity, whatever. All those companies stand for something other than the blind pursuit of profits. Whilst profits were and are certainly the end result, they are not the reason for being. Apple is product. IBM is product. Microsoft is product. GM is product. What was Circuit City? You get my drift? Whenever a company does not stake a place in the consumer’s brain, then its chances of suffering a type-A failure and simply disappearing are that much greater. Good strategy should never be a profit only pursuit. It should strive to stake a position in the mind of the consumer, either by the nature of the product, the level of service or the quality of the process. A business that is structured purely for profit cannot do this and is really one miss-step into the abyss. Because your business will fail. The CEO

Thank You

A short note to say thanks to all you who have spared a moment in your busy lives (if it's anything like mine you should consider joining me in the upcoming petition for a 48 hour day) to read my musings on all things strategy. I intend to post a blog atleast once a month and sometimes bi-weekly from now on. Thank you The CEO

Moving Target

Now let us continue with the sporting analogy. In soccer, the aim of the game is pretty straightforward or so it seems. The team that scores the most goals wins the game. Consequently it wouldn't be a long stretch to assume that in a league, the team that scores the most goals throughout the course of the league wins, right? Wrong because there is the other side of the coin which is that a team not only has to score goals it equally has to prevent the opposing team from scoring the most goals. So now we are getting somewhere. A team has to a) score goals b) limits goals. Is that all it takes to win? If so then the correct strategy for winning a league is to a) assemble the most prolific goals scorers combined with the most stingy of defenders. Common sense dictates that such a team would inevitably win. But is that the case in real life? Some of the most expensively assembled teams go through seasons without winning any silverware. And if you assume that expense equals talent then our conclusion above should have been sacrosanct. Why then the disconnect. Well because the game is actually not static. Each team brings it own particular flavor which changes the game. So a one size fits all does not work for a league in which you are playing 20 different teams with 20 different characteristics. The teams then that win are the ones that read each game correctly and align their strategy accordingly. This may involve changing players depending on the opposing teams strengths, and may even include sacrificing some of those prolific scorers or defenders! For a team to win the league then is no small feat. It becomes even harder for a team to win multiple seasons. The analogy to successful corporations is unmistakable. Strategy can not be static but must be fluid, changing with the ever evolving landscape and relative moves of its competitors.

The right game

I am an amateur boxer. Nothing very serious. Just a couple of guys in the gym fighting against one of nature's inevitability-a bludgeoning waistline. But rated amongst my peers in the gym, I am pretty good. I have won a few fights lost a few. Mostly won more than lost. But that wasn't always the case. When I first started boxing, I would always start strong. I would throw rapid fire punches as soon as the bell rang, landing few but secure in the strategy that if I landed one good one it would be lights out for my opponent. Inevitable, I would get tired right around the two minute mark of the scheduled four minutes and would end up losing the fight. So what has changed?

While I have certainly built a little stamina over time and my skills have definitely gotten better, none of those improvements are so marked as to justify my increased winning percentage. Rather it is my change in perception of the game of boxing that has contributed to my winning. You see like most boxing enthusiasts, I was taken in by the knock out hype. A Mike Tyson or a Manny Pacqiao happens by once in a generation but then that is what most of us amateur enthusiasts get drawn to. So in my case, I envisioned myself a Tyson like fighter-with a hard right that would floor my opponent in 60 seconds. In reality boxing is nothing like the one off greats make it out to be. It is a sport of timing, of pacing, of carefully managing your reserves and waiting out your opponent. An endurance race. So while I was thinking of the sport as a sprint, it is in actuality a marathon. You don't have to take my word for it. Think about what a prime boxing event between elite fighters entails. Two top-notch athletes that are extremely well conditioned. It would be very hard for one to knock out the other. That is why according to boxrec only about 28% of fights end in knock outs.

As soon as I realized that, my whole outlook to boxing changed, I no longer worked to muster that killer punch but instead worked on increasing my endurance and stamina, my main strategy being to outlast my opponent as opposed to knocking him out. And I saw immediate results. So what was I doing wrong? It is my misconception of the sport that was the problem. And because I had the game wrong, the set of skills that I was mustering were not giving me the advantage I sought. Until I figured out the correct game, I could have worked on that killer punch for eons and not seen any improvements.

Almost every company nowadays has a sizable corporate strategy division filled with top-notch MBA's from the best business schools and with gigabytes of impressive power point slides about where the company is heading strategically. So why are they all not succeeding? Part of the problem lies with the identification of the game. There are whole host of strategy road maps created to enable a corporation understand where it stands. Five Forces, Value Maps, Net Maps all help plot an organizations place in the industry. But an important corollary to this is the assumption that the industry or game is actually the right one. Should a company make an error in identifying the nature of its game as I initially did in the game of boxing, then no amount of power point presentations can improve its competitiveness.

Marketing

I was on vacation last week and had the absolute time of my life. Now I know this blog is not about my vacation. The reason I mention it is that while there, I ran into one of the most targeted marketing operations I've ever seen (and I've seen many). This got me thinking about marketing and how it's the fulcrum upon which strategy turns. So, this month, I will talk about marketing.The marketing operation I encountered was genius in its simplicity. The product these folks were hawking was time shares. And while the prevailing school of thought would have you believe that the way to market is to sell something (a dream) as attainable to people (that don't have it yet), these folks were selling vacations to?-yes!-people on vacation! Their logic? The people on vacation are the ones most likely to want to vacation again ergo purchase time shares. Now I'll admit from the outset that I don't really know much about time shares and can not say one way or the other whether they are a good investment. However despite my scepticism these folks got me to sit through a two hour marketing presentation. How do they do that? By offering a free show which would typically go for about $200. So, for a $200 value, they get to book two hours of your time. Which, like that Visa commercial says, is "priceless! A company can have the best strategy in place and execute it to a t. All that is for nought however, if the customers are not getting "marketed" to about the great product on offer. And since advertising of the mass kind is prohibitively expensive for all but the biggest companies out there, it behoves firms to ensure that whatever marketing dollars they are spending hits not the widest audience possible (cost) but the widest "targeted" audience possible (cost effective). Which is where strategy comes into play. When a company works on a strategic plan, it should be cognisant always of the cost it takes to sell the end product and which in turn should influence the strategy. If I have a product that is easily recognisable in the market and decide to change that product in some way, I should recognise that the "new" product, albeit better, will still require more marketing resources to attain comparable sales. Thus, depending on a company's financial health, it may be better to stick with a tried and tested product unless the resources exist for the additional marketing necessary for the new product.

The illusion of growth

I was recently stuck in traffic (not an uncommon occurrence in today's metropolitan areas) and it got me thinking about the fallacies associated with movement. The traffic i was stuck in was stop and go traffic meaning that we would move a few yards and then come to a complete stop. Because of this, some cars were taking an alternative route, which also had traffic. However the traffic in the alternative route- albeit just as heavy- kept on moving constantly. Even though the time spent may have been the same on both routes, the constantly moving one gave the illusion of movement and thus seemed more attractive to the time conscious commuter. In a company's life, just as in traffic, it is inevitable that there will be periods of stop and go movement. Notwithstanding that truism, companies are constantly punished at the stock market whenever they exhibit signs of a plateau in growth. This trend has become so widespread that companies no longer issues dividends for fear of being labelled "mature" with all the negative connotations that entails.

Industries too have cycles. From nascent to teething to high growth to maturity. Notwithstanding, companies are constantly looking for ways to spur growth as indeed they should. And one of the ways to growth is through acquisitions. However it becomes a problem when companies pursue the appearance of growth to the detriment of long term strategy. In hindsight, many of the mergers that occurred in the boom years were ill conceived and would in the long run not realize the benefits they touted. Hewlett Packard and Compaq's ill advised marriage is just one example of this. However the short-term benefits to the bottom line that occurred as a result of those mergers became so attractive that companies lost sight of the truism. The illusion of growth can never, in the long term, replace actual growth.