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Transformation Leadership Through Advanced Analytics

Proceedings — Session: H-3
2011 ISM Diversity Summits
February 9-11, 2011
Boca Raton, Florida

Presenter: Ricardo Ruiz-Huidobro, Partner, A.T. Kearney

A.T. Kearney Partner Ricardo Ruiz-Huidobro has presented at every Hispanic Supply Management Summit since the program was launched in 2007. So, he knows plenty about the changing — and ever-increasing — demands placed by CEOs on their supply management teams. To this end, he began his session by acknowledging a trend everyone in the room could relate to: CEOs expect supply management to drive more and more value, period.

Having surveyed CPOs on the subject, Ruiz-Huidobro predicted, with a high degree of confidence, that five areas will represent the most call for improvement in the near future. They are, respectively:

1) Innovation/growth
2) Value chain optimization
3) Strategic cost reduction
4) Sustainability
5) Risk management.

In a word, strategic sourcing sums up a lot of these on-the-rise expectations. Getting to this next level of purchasing prowess will require procurement teams to hone their analytical talent and skills, Ruiz-Huidobro contended — specifically, their use of heavy analytics, their understanding of "the art of the possible," and their collaboration skills across the entire value chain.

"The new supply management candidate needs to be analytics-savvy to produce the results the CEOs want," he told attendees. "The 'new normal' is complex. There are lots more variables to navigate, which is a challenge for many organizations.

According to Ruiz-Huidobro, next-level supply management has a decidedly global focus. "It involves the need for certain related aptitudes: global sourcing, joint process improvement and relationship restructuring," he said. "The questions you can ask today are much more complex."

At the same time, he cited recent statistics from a procurement/IT analytics client that spell trouble in this area: Only 28 percent of procurement professionals on staff reported a high degree of confidence in their spend data. According to Ruiz-Huidobro, this is mostly due to the team's reliance on outdated 1990s technology that fails to factor in constantly changing business issues, such as the current recession and its resulting market turmoil.

"Fortunately, five new analytical tools enable the unlocking of value beyond what can typically be achieved through classic sourcing," he pointed out.

1) Should-cost modeling. "The challenge with should-cost modeling is really achieving stability beyond what the supplier is telling you," he told attendees. "When you understand real cost drivers, you have a lot more facts."

Of course, getting this should-cost view requires proprietary supplier information — its profit figures, for example — which can be very difficult to secure. In the event a supplier is unwilling to share such data, Ruiz-Huidobro recommends using the request as a bargaining tool.

"If they won't share this information, let them know that Supplier B or C will," he advised. "Also, keep in mind that they're being asked by enough customers for this same info, post-recession. So, they might not resist as much as you'd think."

If sourcing professionals still can't get their hands on data like this, Ruiz-Huidobro suggests they "build their own understanding" of the should-cost structure through research. Because this work is time-consuming for high-level supply management professionals, he pointed to an emerging trend: procurement analytics groups.

"Many of these groups are made up of professionals with business and finance backgrounds," he said. "Everything can be decomposed into costs. You really can take a stab at this kind of breakdown on your own."

Cost-regression analysis. "This is a tool you'd use when you have lots of SKUs — with cardboard, for instance — and you can't really compare costs," Ruiz-Huidobro continued. "To do it, you'd need a massive database."

In contrast, cost-regression analysis focuses on variables that "draw the picture" of those SKUs' cost, he continued. In practice, this might mean taking 10 variables of cardboard SKUs, for example, and then plotting them to draw a line. "Find out how all these costs compare to the should-cost," he advised. "It's a formula you create."

Any new SKU that comes along also gets applied to this formula.

Cost-regression analysis can be conducted by supplier or by item. "It gives you tremendous power to uncover costs," Ruiz-Huidobro explained. "It's all about uncovering more data. That gives you more power to ask more of suppliers."

Collective optimization. In the past, collective optimization took the form of massive Excel spreadsheets. "That got tedious," Ruiz-Huidobro recalled. "Now, collective optimization 'engines' do the work for us."

These so-called engines let supply professionals plug in a multitude of supplier "what-ifs" to determine optimal award allocation. This information then enables them to reconfigure supply chains and find the most successful supplier. Overall, this tool lets supply management professionals compare as-is, preproject scenarios with example award scenarios for the best possible outcome.

"You can also feed it different scenarios and constraints to see what those are costing your organization," he pointed out.

Risk-balanced deal structure. To illustrate this analytic tool, Ruiz-Huidobro offered up the example of a consumer products company that buys $5 billion annually in raw commodities — sugar and peanuts — from five different commodities houses. "That means thousands of contracts are in place with thousands of buyers," he explained. "If they concentrated on just a few of the commodities houses, maybe they could triple the volume they're buying. It'd be a whole new relationship."

In essence, then, a risk-balanced deal structure enables supply management professional to analytically negotiate massive, multi-year contracts.

Of course, this approach only works if a supplier can deliver that volume on time and on budget, Ruiz-Huidobro warned. "If so, great," he said. "If not, that savings could be eroded by new-product costs, R&D and so on."

Complexity reduction. According to Ruiz-Huidobro, complexity reduction a key question: How many products/flavors/models do we want to offer? It also engages R&D in drawing "complexity trees" and, ultimately, lets procurement professionals simplify their product lines. "This translates to direct savings."

He offered up the example of an expressive bidding approach for transportation services. Using this tool, suppliers can submit offers that leverage unique value drivers and create savings.

"Basically, they can plug in lots of variables and alternatives to win your business," he explained. "And, within the customer's company, scenario analysis allows them to model 'business constraints' and understand their impact on cost and allocation."

Information Is Power

In the end, advanced analytical methodologies give supply management professionals the power to put continued emphasis on cost emphasis through should-cost modeling and regression analysis. They unlock additional value through collaborative optimization by analyzing sophisticated multivariable scenarios and seize the opportunity space in collaboration with the supplier.

Additionally, these methodologies can be employed to balance risk and achieve significant benefits through cleverly structured long-term supplier partnerships. Finally, advanced analytics let procurement professionals find the right level of complexity to maximize value-creating variety and minimize non-value-adding complexity.

"CEOs expect a lot of you already; they'll only expect more as time goes on," Ruiz-Huidboro concluded. "To meet these expectations will require continued improvement in costs — and driving value beyond costs."

— 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.