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Supply Chain Expectations from the CEO

Proceedings — Session: E-2
2011 ISM Diversity Summits
February 9-11, 2011
Boca Raton, Florida

Presenter: Joseph L. Cavinato, Ph.D., Thunderbird School of Global Management and Center for Strategic Supply Leadership at ISM

For his session, "Supply Chain Expectations from the CEO," Joseph L. Cavinato, Ph.D., highlighted the commonalities among nearly 5,600 personal interviews he has conducted within 900 companies and organizations worldwide since 1999.

"Because everybody likes to brag about what they've already done, one of the last questions I asked every person I interviewed was, 'What's next?'" Cavinato said. Based on these responses, he was able to drill down on today's "currents of energy" — what he considers imperatives for supply professionals — in five areas.

1) The economy and global business. As Cavinato explained, the most recent recession accelerated the evolution of many industries. One of the byproducts of this rapid evolution was industrial Darwinism. "This spurred the demise of the weak companies that might have survived a weak recession, and also the subsequent evolution of new companies," he explained.

In fact, slightly more than 50 percent of the world's Fortune 500 companies were founded during the four most brutal economic recessions in our nation's history, including the most recent one. (Among these is Walt Disney Corporation.) Surprisingly, these recessions comprised only 14 years, combined.

For supply chains, specifically, the most recent recession reduced costs in the supply chain, with regard to each step and function, reduced costs of the supply chain (parties, processes), and signaled the redesign of the chain in the form of new supply and business models.

"The depth of this recession is changing the landscape," Cavinato contended. "Many companies have done so much belt-tightening that they can't push their suppliers any further. And, supply management has moved from processing buys to taking over responsibility for entire lines of corporate spend and categories."

As Cavinato learned during one corporate interview, supply management's focus is now, above all, on corporate performance and success — leading and managing what creates corporate competitiveness. "This was a person who admitted that, although he still manages spend at the company, it doesn't even come up in the boardroom conversations anymore," he said.

2) Expectations from CEOs and boards. According to Cavinato's research, the C-suite expects more of supply management than ever — cutting spend, capturing synergies throughout the company and supply chains, reducing overhead, streamlining processes, reducing the company's exposure to risks (whatever they are), tapping cross-functional value benefits and driving transformation.

More and more, CEOs also want to know what the supply management function is doing to drive new revenue. "They're constantly asking about our new product revenue/growth," he explained. "In an effort to conserve cash, they're also asking what suppliers the company really needs."

Even the concept of value-add has expanded, Cavinato asserts. Whereas capturing value was a supply manager's focus until about the mid-1980s, today the focus is on creating value. "This — not purchase price variable — is what gets the CEO's attention now," he told attendees. "In fact, purchase price variable never has."

Another increasingly important CEO expectation is supply management's ability to innovate without the company having to invest. "Open innovation and open innovation process models are now a huge area of focus," Cavinato shared. "I hear 'innovation' and 'new revenue' way more often than 'cutting cost' during the interviews."

All this means the space between supply management and the CEO is narrowing, which is great news. "We aren't just being asked to cut costs or manage spend anymore; now, it's a request for us to help change the actual cost structure of the business — and do it in a way that minimizes our organizations' risk," Cavinato explained. "Soon, [supply managers] will be talking about growth over spend. And, we'll be talking about our reach."

The gap between the CEO and the supply chain is narrowing even further given the comparatively short tenure of many CFOs — many of whom are on three-year contracts, Cavinato added. "They don't usually have a long-term interest in growing a company, so CPOs are looked to for value-add ideas and strategies."

3) Next world-class procurement/supply organizations. Cavinato believes a handful of trend imperatives are converging to shape the next generation of world-class supply organizations. These are:

  • A focus on generating top-line revenues. "In other words, supply professionals must be able to see across the business," he explained. "Their mind-sets must evolve from focusing on cost control, to being good at cost management, to taking on financial cost leadership and, finally, to managing bottom- and top-line revenues."

  • The ability to lead/manage supply of the business. "You need to think in terms of, 'This is where we're successful as a business. What's the supply behind those products?'" Cavinato explained.

    World-class supply teams have moved beyond strategic sourcing to category management, to looking at the ongoing total cost of ownership and then to category leadership. "They look upstream and downstream for potential savings ideas," Cavinato told attendees. "They also embrace the stakeholders in their chains and seek standardized specifications for operating simplicity."

  • The capacity to act as "CFO" of the supply chain. Cavinato believes the supply team must expand beyond budget and purchase price variance, to having integrated transparency of the supply chain, to having an idea of the financial and competitive imperatives of the product/service, to business activity financial leadership. "We're almost like analysts for the business," he said. "We're helping our supply base become better suppliers."

  • Providing resource leadership for the company. "Being a resource leader means actually leading the supply chain," Cavinato said. It also means bringing leading ideas to the value chain and increasing supplier value-add, he concluded.

  • Acting as a business partner of product/service competitiveness. "This requires a mindset of, "I'm here to increase the revenue, health and growth of this business," Cavinato explains. "It means being an owner of products and services, even though you're technically not."

4) Our evolving capabilities. CEOs increasingly expect supply managers to be financially savvy. This entails understanding income statements, balance sheets and sources/uses of funds statement, or the cash flow of the business. "You need to be very comfortable with concepts like return on capital, return on sales, gross margin and contribution margin," Cavinato told attendees.

He also detailed what he calls "power capabilities," beginning with understanding and supporting the company's business model — in other words, knowing where the company makes its profit.

Other power capabilities include marketplace intelligence (looking beyond the top suppliers to the ones poised for growth), being very comfortable around innovation and the capture of regional and global synergies, and negotiating beyond price.

Cavinato also emphasized the importance of forging collaborative relationships, both internally and externally. "[The older generation] wasn't taught this; we were taught how to 'beat up' suppliers," he acknowledged. "But, younger people do this intuitively, thanks to Facebook, Twitter and so on."

What It All Means

These five imperatives are the 'green shoots,' Cavinato pointed out; the big picture for procurement/supply in coming years is that the function is on the move. Stakeholders will need to be led, and expectations will be stronger because it's more difficult than ever to make a profit, he predicts.

"I love to ask CEOs, 'If you were 10 years younger — in this same role, but with your current knowledge — who would you hire?'" Cavinato concluded. "Invariably, the answer is the same: They would hire predictors.

"These are the people who have a sense of what's coming based on what's happening," he continued. "They're the employees who focus on planning — who pose alternatives and scenarios instead of reacting."

Fortunately, Cavinato believes supply management professionals are ideally poised to take on the predictor role.

"Supply has a greater vision across the organization than anyone else — more than sales, more than marketing, more than human resources, and more than operations," he explained. "We truly have a helicopter view."

— Reporting by RaeAnn Slaybaugh

About ISM Diversity Summits

Every year since 2009, ISM's Black Executive Supply Management Summit (BESMS), Hispanic Supply Management Summit (HSMS) and Women Executive Supply Management Summit (WESMS) have been co-located. Collectively, these events represent the annual ISM Diversity Summits experience hosted by Tempe, Arizona-based Institute for Supply Management™.

All three summits were developed as forums for diverse executives in supply management to come together and share their unique perspectives. Summit attendees learn from thought-leaders and change agents within their fields and representing leading organizations.