The chief supply chain officer has emerged as a vital partner in the most strategic aspects of managing complex, global companies. In years past, the procurement function (the sourcing of essential products and services on the best possible terms) occupied center stage. But more recently, the relentless focus on driving out costs has taken a backseat to such issues as supply market risk, revenue enhancement and managing complex supplier relationships.
A word about titles: This article considers the relationship between the CEO and the senior supply chain leader. Larger organizations with a global footprint often have a chief supply chain officer (CSCO). Sometimes they are called chief sourcing or materials management officers. Smaller companies usually have a chief procurement officer (CPO). By whatever name, these executives have similar responsibilities.
A Strategic Perspective
“I expect our head of sourcing and materials management to provide a strategic perspective on the markets we deal with, identify and mitigate supply-related risks, lead change internally and work with our supply base to identify and contribute their best ideas,” says Kevin Crutchfield, CEO of Alpha Natural Resources, an $8 billion coal producer based in Bristol, Virginia. “That means contributing to the major areas that drive value creation: revenue enhancement, cost reductions across all areas of spending, working capital improvements and better capital project development and execution.”
Many complex problems that resist solution respond when framed as supply chain management issues. Hospital medication errors, for example, are responsible for more than 400,000 preventable drug-related injuries each year, according to the Institute of Medicine of the National Academies. It’s tempting to think of the hospital medication errors crisis as a problem for physicians and nurses to solve. After all, it’s physicians who prescribe and nurses who dispense the medication.
“The physician community tried and failed to conceptualize a solution to this issue,” says Lynn Britton, CEO of Mercy, a $5 billion healthcare provider based in St. Louis. The solution, now rapidly being implemented at Mercy and other hospitals, flowed out of Britton’s decision to frame the problem as a supply chain management opportunity.
Britton’s perspective is especially relevant because he is a rare example of a CEO who ascended to the top spot after a career in supply chain management and procurement. His background has paid off and likely saved lives. Mercy hospitals drastically reduced its medication error injuries by repackaging drugs in individually bar-coded unit-dose formats with computer checks at the patient’s bedside. “It’s important for CEOs to involve their supply chain chiefs in the big picture,” Britton says. “Then, it’s fair for the burden to fall on the supply chain leader to articulate an initiative [of] how supply chain management can be a key enabler of that strategy.”
Managing Complex Customer Relationships
“Supply chain management should no longer be focused solely on driving out costs,” says Randy Dearth, CEO of Pittsburgh-based LANXESS Corporation, an $8.5 billion chemical company spinoff from Bayer. “When it is aligned with the business priorities of the organization, supply chain management can play a fundamental role enabling the company’s growth agenda, mitigating risk and delivering competitive advantage across the end-to-end value chain,” he says.
Mitigating risk and volatility in the supply chain is an emerging strategic role for CSCOs. For example, the commodities LANXESS uses as raw materials for the fine chemicals, color pigments, plastics, synthetic rubber and water treatment products it manufactures have one thing in common: they are all based on petroleum. The chemical company’s CSCO is part of the team that predicts the volatility in pricing of petroleum products and can hedge some of that volatility, Dearth says.
Although identifying and driving out costs will always remain part of the mix for organizations with mature supply chains, the reality is that there is relatively little incremental cost available for cutting. “As markets mature, the real opportunities for SCM [supply chain management] are in identifying opportunities for revenue enhancement and helping the CEO manage increasingly complex customer relationships,” Dearth says. “Visionary CEOs see profit opportunities in taking a holistic, end-to-end approach that integrates procurement teams across the business.”
Consider the increasing complexity of customer relationships faced by the CEO of a company like LANXESS. Given the relatively small number of major players in the chemical industry, LANXESS often finds itself negotiating with a company that is at once a supplier, a customer and a competitor. “It’s a fine balance that can be easily upended by a procurement manager so narrowly focused on shaving a few cents off the price of a commodity that the customer relationship becomes strained,” Dearth notes. “It’s so easy to get into contentious relationships with partners when there are overlapping interactions,” he says. “A good CSCO applies just the right amount of pressure on pricing so that it doesn’t disrupt strategic supplier or customer relationships.”
Here’s a cautionary tale of what can go wrong when procurement goes for a quick win without considering the larger picture. The procurement manager of a $40 million technology company demanded new payment terms of net 60 days from all of its suppliers. Good for the company’s cash flow, right? Not really. At least one supplier was also a large customer that purchased more product from the company than it sold. That supplier/customer, in turn, demanded 60-day terms from the technology company. Result: a net disadvantage.
Where the CSCO really earns his or her seat at the table is partnering with the CEO to optimize capital allocation, increase return on invested capital and reduce total costs of ownership. If that sounds like the CFO’s job, welcome to the brave new world of SCM. “Capital allocation is key across the business,” says Lisa Martin, senior vice president of global procurement and operations at Pfizer, the world’s largest biopharmaceutical company.
Martin, who reports to Pfizer’s executive vice president, CFO and business operations, directs her supply management team to promote all-around capital allocation, one of the four strategic imperatives articulated by CEO Ian Read. By implementing a new sourcing model, for example, Martin’s team helped Pfizer commercialize products faster. “SCM plays a role in revenue generation,” Martin says. “We identify levers we can pull to optimize capital, increase speed and maintain our quality standards.” To that end, Pfizer deploys financial impact teams to tackle workstreams specific to return on investment capital (ROIC), such as inventory management, vendor payment terms and real estate optimization. “The modern day CSCO has a significant role in delivering value to shareholders, customers and the public when there is strong collaboration between the CFO and the CSCO,” she says.
Martin also manages Pfizer’s supplier diversity and sustainability programs from a supply standpoint, two elements of a far-sighted SCM portfolio. Pfizer has a public goal to decrease CO2 emissions by 20 percent. The supply management teams are working with Pfizer’s original equipment manufacturer (OEM) and car fleet partners to drive that efficiency, and the company has earned awards for green building and energy conservation in many parts of the world. Pfizer also has a dedicated program to ensure that there are bid opportunities for women- and minority-owned suppliers. “We value the benefit that women and minority suppliers bring to the table,” Martin says. “We find that those suppliers bring a different degree of innovation and responsiveness.”
A Catbird’s Seat on Cash Position
The key element of any transformation of SCM from a focus on shaving costs to a more strategic orientation requires two things: full-throated advocacy by the CEO and a relentless emphasis on the P&L objective. James Hackett, CEO of Steelcase, a $2.5 billion office furniture manufacturer based in Grand Rapids, Michigan, understands that the CPO is as critical to Steelcase’s success as the head of product design. “The CPO must understand the end-to-end process in which our products will exist—from what creates or reduces friction to what adds value—so that we end up with the best manufacturing model.”
Tom Linton is CPO at Flextronics, an electronics manufacturing services provider with operations in 30 countries. Linton believes that the CPO function offers Flextronics CEO Mike McNamara real-time visibility and flexibility over the costs of inputs and a big impact on the cash position and balance sheet of the company. “From the CEO’s perspective, the CPO has a role to play in driving down costs and managing cash, inventory and working capital, as well as providing high-level metrics that drive all the C-suite conversations,” Linton says.
The CEO’s relationships with key suppliers can be just as important as relationships with key customers. Every CEO has relationships with important customers on the sale side of the equation, but the mirror image of that relationship—the one between the CEO and critical suppliers—is often overlooked. A central role of the CPO is to identify the most critical preferred suppliers and help architect a relationship between the CEO and the chief executives of the supplier for the long-term integrity of the supply chain. “SCM is a gearbox for those relationships,” Linton says.