CPSM Blog

Social Responsibility: supply business conduct and external suppliers

If you are wondering about the need for the social responsibility topic in the CPSM exam, all you need to do is recall the garment manufacturing building collapse in Bangladesh and think that there were at least some folks in the supply management chain who could have been more socially responsible and prevented the tragedy. For a supply management leader is not merely concerned about sourcing from the lowest cost global supplier, but is supposed to be watching for any corners that unscrupulous second tier suppliers might be cutting. The supply manager cannot keep asking for lower prices if it means that the tier 1 supplier is going to simply try and get the work passed off to a tier 2 supplier that leads to a building collapse and disaster. That the supply manager and leader is interested in not just low prices,great quality but is looking out for the welfare and safety of her/his entire global supply chain is the overall thinking of the "Social Responsibility" section. Included in this section are an understanding of the following:

• ISM principles and standards of ethical supply management conduct
• ISM principles of social responsibility
• The United Nation's ten principles of global compact

In general you should not only follow applicable laws but go beyond laws to ensure that your entire supply chain is working in a socially responsible manner.

More examples of Corporate Social Responsibility and Supply Chain are here.

What documentation for cross-border transactions?

In this section , the supply manager is being asked to be aware of the kind of documentation and laws must be kept in mind, when buying from global sources. Also it is the responsibility of the supply manager to ensure that proper documentation is maintained so that the exact steps taken in foreign sourcing is always available for scrutiny by government and international agencies.

It's sort of interesting that as the CPSMBlog discusses this important topic, President Obama mentioned  the corruption problem at the University of Cape Town, South Africa today. The full text of President Obama's University of Cape Town speech is here and scroll down to the 44th paragraph from top and we quote:

"Now, I know that there are some in Africa who hear me say these things -- who see America's support for these values -- and say that's intrusive.  Why are you meddling?  I know there are those who argue that ideas like democracy and transparency are somehow Western exports.  I disagree.  Those in power who make those arguments are usually trying to distract people from their own abuses.  (Applause.)  Sometimes, they are the same people who behind closed doors are willing to sell out their own country’s resource to foreign interests, just so long as they get a cut.  I'm just telling the truth.  (Laughter and applause.)"

Paying a bribe to a foreign government official  is prohibited by International Anti-Bribery Act of 1998 in the US. Although it applies for selling abroad , supply managers are expected to be aware of the provisions as a part of this topic and its implications for supply management.This is particularly important to understand for the non-US supply managers who read this blog and are pursuing the CPSM.

Other topics in this section include keeping track of any import licenses, customs duties applicable and making sure that you are meeting the legal requirements of international transactions as applicable to your location. Brokers are particularly helpful to clear goods and make sure that all customs duties are paid and importantly there is no delay in clearing goods. Inbound containers are also checked for threats by port security and smart containers can help.

To summarize, this section is very timely for supply mangers given the increasing globalization and ease of communication via the Internet. Just getting the right supplier at the right price is not enough but keeping track of applicable laws relating to foreign supplies is an important responsibility for supply managers irrespective of their location.

Developing international sources for materials and services

The general public just reads about international sourcing or outsourcing for materials and services but the supply manager has to deliver on this topic (Task 1-C-2) for her/his organization. Here are the key topics in this section.

• Benchmarking and Researching Sources: A supply management leader must start with the Internet on researching international sources for goods and services but needs to also be active on several fronts. These include attending trade fairs and conferences of your industry. The Detroit Auto Show in Detroit USA if you are working at any point of the auto supply chain, the Interpack Trade fair in Dusseldorf Germany if you are involved in the food and packaging industry anywhere in the world. You might argue that why do I need to travel countries if I can just search the website or better still wait for the marketing folks of the supplier to contact me. Guess what: if you do not take an active role in researching and benchmarking supply sources yourself, you might land with only average suppliers who have very active sales teams. If you are at a trade conference and ask another supply management colleague for frank feedback about the supplier, you are likely to get a very clear picture.
• Interpersonal skills and cultural awareness is a tricky area and a sincere effort and interest to learn about business practices and culture ahead of meeting your counterparts can be useful. In eastern Asia, Japanese executives might get pretty offended if you inadvertently scratched their business cards with your finger nails! Similarly clocks as gifts in China are not recommended. The trouble is that many suppliers (being suppliers) feel hesitant to speak up about stuff they find objectionable. Throw eastern politeness in the mix and you suddenly find that the supplier is not doing 100% for your organization after you have given them the work. 
• Tariffs, Exchange Rates, Fees and Logistics are other areas you need to think about as you develop expertise on international sourcing. However, much of this stuff is available online. A good way to search for details is to search in the domain of the country you are looking for. Thus instead of searching Google.com alone in you are interested in say India you should also search in the Google India website http://www.google.co.in/.

A good way to prepare for this section is to actually observe the various things your organization does to develop international sources for materials and services. Today it is almost impossible to find organizations who are not involved in International sourcing given the Internet, easy communications and general globalization.

 

Identify and assess international markets to source goods and services

This is the first time that this CPSMBlog is putting out a post on 1-C-1 because in the previous round of topic wise posts I was running short of time and started making only brief comments. The first part of this International section (1-C-1) is about assessing International markets to source goods and services.

Since business is global, the supply side of the businesses needs to take a global perspective on sourcing goods and services. Here are some key points to think about in this section:

• Cultural awareness: As a buyer you should try and understand the culture of the supplying country. No culture is necessarily better or worse - but it can be very different. In addition, assuming that a new supplier from a different country will "know" your purchasing process and procedures may be a mistake. In some countries and organizations it may be okay to submit a bid late with prior information but in certain organizations (particularly public sector ones) a buyer is under pressure to stick to the letter of the tender notice. So a situation can arise that a very good foreign supplier who has spent considerable effort in preparing bid documents is excluded because of a day's delay in submission.
• Accounting and Labor practices: Among a whole bunch of issues in globalization of business the supply manager needs to be aware that that accounting practices may be different in different countries. The imposition of Sarbanes Oxley (SOX) in North America compels organizations to have a clear picture of their accounts payable, receivable etc. whereas this may not be true in many Asian countries. The supply manager needs to be aware of the situation for each supplier particularly if the supplier is critical to the functioning of the buying organization. The aim here will be to ensure that the supplier will not suddenly go out of business due to some unforeseen liabilities. Similarly in labor laws, the supply manager must be clear about how labor laws work in the sourcing country. See Cocoa beans Nike example. 
• Infrastructure, Risk and Cost Benefit: Infrastructure of roads, electricity and communications is important to evaluate for the country you are planning to source from. Also risks like political risks are important to estimate as supply arrangements are made from another country. Keep in mind though that sourcing from another country will always carry risks and the skill of the supply manager is to ensure that the benefits of sourcing from another country outweighs the risks of sourcing from that country.

Where is the money coming from for purchases? Developing financing and leveraging strategies

In this Task 1-B-5 the supply manager is being challenged to think creatively about strategy relating to financing and leveraging for B2B purchases. In other words, the leader-supply manager will not simply expect the finance folks to come up with the money to pay for purchases but will be alert for ways to help the buyer's organization without harming the seller’s interest. This section lays out 16 methods of trying to apply financing and leveraging strategies. The first five of these sixteen are:

1. Cash flow of the buying organization should be something the supply manager should keep in mind before placing large orders. So just before placing a large order with an existing supplier the supply manager can check with finance and find a solution of splitting the order or discussing extended payment terms with the supplier. Doing so helps with keeping orders on track, keeping payment promises and the supplier committed.
2. Interest rates impact supply managers because if money is expensive large orders that stay as inventory becomes expensive. Becoming more alert to JIT (Just in Time) supply possibilities is an option to consider. Also financially weaker suppliers become more vulnerable as interest rates rise and the supply manager needs to carefully monitor these "at risk" suppliers.
3. Payment Terms to suppliers is one of the most direct ways that supply managers can help with their organization's cash flow challenges. This does not mean that a "one size fits all" approach is taken. Thus while Finance folks may want 180 days the supply manager must carefully ensure that their payment terms are in line with the supply industry. For example where the supply industry is used to 30 days payment a suggestion of 180 days payment will result in poor reputation or even panic in the supplier community.
4. Depreciation is something that happens in the books. But it gives cues to Supply managers to plan for replacements or leases ahead of time as depreciation and obsolescence sets in for plant and equipment.
5. Market conditions include the stage of the product life cycle for which the supply manager is buying. Thus at the introduction phase the supply manager should not buy too much raw material but be able to calibrate supplies to reduce the risk of lower than expected sales. On the other hand in the growth phase, having production stop due to supply shortages is avoidable. Also important is the Risk-Value nature of the category being purchased as was discussed in the earlier post on this topic.

Indirect costs and Target costs in cost analysis

As pointed out in the earlier post this is a large section of 20 pages with 8 questions and therefore well worth the effort of studying in detail because (a) it’s the largest number of questions in the 1-B part (Cost and Finance) part of the CPSM exam (b) this speaks to the central purpose of the traditional purchasing/supply manager's role in organizations. Ultimately top management does ask the supply leader about costs and therefore it’s essential to be really clear about the topics of this section given its perceived importance and alignment with the supply manager’s role. There are several topics in this section and this post specifically discusses the only Indirect costs and Target costs. So here goes:

• Indirect costs are those costs that are not directly related to the supplied item in question. Thus if you buy packaging material you have to keep in mind that you have already invested in a particular packaging equipment. The interest and depreciation of the equipment is fixed cost and you cannot do much about them. The electricity and labor used on the packaging machine varies with how much the packaging line is utilized. This provided your labor is paid by the hour. If labor is on a salary that cost is pretty much fixed. Why should you care about indirect costs of equipment if your job is to buy packaging material? Because frequently you find that your supplier choice becomes limited when your equipment can do only some things. As you get into understanding the packaging material market, you become more knowledgeable about newer types of equipment that perhaps is more able to deal with thinner or more environmental friendly materials so when it comes time to decide to replace packaging lines you can weigh in with your expertise.
• Target Costs is the fascinating concept of arriving at a target cost for raw materials, components particularly for new products. Let us say that your organization has figured out that a new product can be sold at $1 a pack given consumer feedback, competitive offerings and projected sales volumes. Working backwards let us say that 20 cents are marketing costs, 20 cents are ingredient costs, 20 cents is overhead costs including fixed and variable costs ( a total of 60 cents). The remaining 40 cents cover packaging costs and profit margin. Today’s packaging costs are say 20 cents and margin is only 20 cents. A typical target cost could be to reduce packaging cost from 20 cents to 15 cents. The traditional way is to try and simply negotiate with the suppliers but the target cost approach could be to work with your suppliers and your internal manufacturing, design and marketing folks. It is possible that you bring down the thickness of the packaging material and use a newer packaging material that has more strength at lower thicknesses. You could find that marketing colleagues are thinking about a multi-pack and you might be able to have outer packaging that is able to take some off the load from the individual packs. You might also find from manufacturing that certain changes in the way the packaging material is supplied (larger rolls) might actually reduce waste in the packaging line, adjusting packaging roll size might reduce transport costs and pallet capacity. Considering all these angles might help you find a solution to reaching the target cost of 15 cents from 20 cents without squeezing supplier margins and not sacrificing quality/performance of the package in the market. In other words, target costing is not about trying to beat the supplier down but instead is about studying what would delight your final customers ( the 1$ pack) while maintaining quality and profits for members of the supply chain. Note : Target cost is a Bridge topic as well.

Where are you spending money? Spend analysis and strategy through Big Data

This rather short section Task 1-B-3 is a power packed section and has become even more important with the availability of "Big Data." See a marketing Big Data example.

In the supply field, let's say that you have 100,000 items bought from 10,000 vendors and these items include leverage items, bottleneck items, strategic items and non-critical items (see the Kraljic Matrix post). What if you could analyze exactly which suppliers were involved in which category, what their quality and reliability performance was and yes what was the dollar value purchased from each supplier? - You could make some great decisions. For example:

• If you had low performing suppliers in non-critical items - you could simply fire them and find other suppliers without disrupting operations.
• Similar low performance would have shown up in catastrophes with bottleneck suppliers because your production might have stopped. With the data you know exactly which suppliers to bet on and also the exact inventory holding cost for bottleneck items.
• If a leverage (e.g. raw material) supplier has been performing badly ... you might have heard from your production planning folks but now you can systematically shift some volume from the ailing supplier as you try to visit them and help sort out problems.
• A Strategic supplier (like a consultant) doing badly is difficult to find out  only from spend analysis because you only know you paid bills, but are not sure whether the spending got you the results you were paying for. 

In other words, strategic action from spend analysis is not just about consolidating suppliers but also about taking your organization to the next level through strategic action based on hard data. And where does the strategic insight come from? It comes from your Company's mission statement and your supply department's mission statement. In other word's look for clues about the direction the company wants to go as you weigh your options of what to do with the spend analysis data.

Getting "Big Data" is really easy and your ERP system is the best bet, (see earlier post). Asking the right spend analysis questions most important to your organization is the challenge. Think of a high dollar value leverage item supplier who supplies some low value bottleneck items as well.  Before you remove  highly specialized bottleneck item suppliers (because they have such a low $ value) stop and think strategically. It might be a better idea to have the leverage item supplier focus only on the leverage items and deliver more innovation there than do a half-hearted job on the low billing bottleneck items that is only of marginal interest to the supplier.Taking out the bottleneck items from a leverage raw material supplier might be a better option.

To summarize, for this section think first about your strategy choices, they seek spend data analysis data, take data driven action that makes sense for your particular situation.

Cost management program strategies for purchasing

The cost management program strategy for purchasing section is at the core of the supply management leader's role. To find a seat at the Chief Officer table the Supply Leader must be able to understand not only the costs in terms of dollar terms but be able to hold her/his own in discussions with the CFO (Chief Financial Officer). For earlier posts on this Section 1-B-2 scroll down. It has 9 sub-sections some of which you are very likely to have dealt with in your jobs.

It is very likely that you have dealt with the question of "total cost of ownership" which includes the purchasing cost, installation cost, service cost and disposal cost. If your organization is strong on sustainability the disposal cost, mode and impact on environment can be an important consideration. Thus if two vendors provide comparable total cost solutions but one has a better sustainability element - you might decide to go for the more sustainable solution.

Included in this section are the concepts of value analysis and value engineering that are sometimes used interchangeably. However, value analysis is about studying existing processes and products relevant to what you are purchasing. For example, value analysis for the purchase of a low value bottle-neck item might reveal that the processes of purchasing sometimes can hold up production. Here, it might be better to just have approved vendors and allow shop floor managers to buy items using a fixed value P-Card.

On the other hand value engineering is connected with the development stage of the new product and innovation process. Here when you are turning a concept into prototype, value engineering can be useful. Thus the development team for a machine might consider a design that allows for easy access inside a machine for servicing and save service costs down the line when the machine is installed at a customer. Such value engineering at the design stage can greatly help in cost management. 

What's the connection of the supply management department budget to the company's strategic plan?

What's the connection of the supply (purchasing/procurement) management department budget to the company's strategic plan? is the starting topic in this section (1-B-1) that catapults the CPSM exam to the C-Suite of the company. For all the other sections are from the CPM exam viz. steps in budgeting, purposes for a budget and  types of budget.Not to say that you should not know the mechanics of budgeting - but it's really important to understand how and why  the supply management department budget is connected to the company's strategic and operational goals.  In fact, the company strategic goals should guide and dictate the supply management department's budget plan because it is in the budget that you put the money where your mouth is and the rubber hits the road!

As I explained in the context of qualitative goals in the product innovation charter, every strategy document,intent and implementation should consciously try to align to the organizational mission... if the overall organization is to move forward. So too with the Supply Management department budget. If say, your company's  mission includes  continually educating and developing it's employees with leading edge knowledge then what does it tell you to include in your budget? It tells you that you should budget for funds for supply department employee training and education. Also, you need to think carefully how many hours of time off for training you will provide. Doing so will explicitly mean that there is a bunch of money budgeted to allow for the training and education of supply management personnel that includes the time off.

In other words, if you read this section and look at your department budget and your company's mission you will find that there are several mismatched items. You are budgeting stuff just because it was included last year although it has a poor mission fit - or you are eliminating mission critical budget items just because of a slow economy.All this  because you never really sat down and thought carefully about the following questions:

• Is this activity of the supply department contributing to the company mission?
• Are the funding and expected results appropriate?
• Are gaps between funding and expected results clear and well articulated?

The budget is a huge mechanism to keep track of spending and earning (like sales, sale of assets etc.). More importantly budgets are the easiest way of reviewing progress towards the goals of the organization and its units including the supply department. Thus if you have a monthly review meeting, and had budgeted for 40 total hours of employee training a month,  and find that you have arranged only 10 hours- you have a problem. Upon review though, this can be fixed for the next month where you consciously arrange for 40+ 30 (the previous month shortfall) training hours. 

To conclude, try to find the higher "purpose" of the supply department budget , i.e. achieve the company goals. On an exam note do read the more tactical stuff around the other standard topics viz. steps in budgeting, purposes for a budget and types of budget in the study guide.

Contract administration: from start to finish

This topic was discussed briefly  earlier  and here goes one more time. If you have worked for a few years in supply management you have literally lived through this topic. Naturally, this is a carry over from the old CPM exam and hence routine stuff that you need to be clear about. To start with you must ask three questions:

1. Manage your organization: What are we we as the buying organization supposed to do under the contract? Who is going to do it? Do they fully understand that we have signed with a supplier? More than potential legal problems no organization wants to be viewed as folks who do not keep promises or simply are inefficient and drop the ball between departments. For example, if your process involves a goods acceptance and quality report before payment - you should know exactly how this paperwork/computer work gets done. If you have negotiated a 2% disount for payment in 30 days you got to make sure that the payment does come through as contracted.If you need contract modifications, do them.
2. Manage the supplier: When large dollar volumes are involved and its service not goods you are buying - it's really important to spell out a statement of work (SOW) and articulate milestones,deliverables and quality expectations in consultation with the supplier and your user department. You have got together a great contract and now you want it to work for your organization and for your supplier on a "win-win" basis. In other words, don't stop thinking "win-win" at the negotiating stage, but think how your user department can succeed and spell out  the steps that the supplier needs to take and how the user would monitor success. Don't become hands off at this stage, remain in touch with the user department and supplier throught these large value service type contracts.
3. Conflict/dispute resolution: You want the contract to complete with great success and satisfaction all around and that's where the two above steps are supposed to help. But sometimes things don't work and you have to terminate the contract.  A mutual "for convenience" parting with the supplier  is desirable. Here the classic analogy is with the human marriage and divorce. The latter can become rather bitter and if you are a great supply manager, you should ideally be able to avoid it by working hard at the earlier steps.