Executive Interview:  Former ISM CEO Novak  on "Three Ways Our World Got Bigger"

Paul Novak, former CEO of the thirty-eight thousand member Institute for Supply Management, sees big changes ahead for the profession, and for manufacturing as well.  Looking back on supply management’s last few years, Novak summed up the changes, “"Our world got bigger - supply management will own manufacturing."  But the manufacturing guys don't know it! It started with sourcing controlling contract manufacturing, and went from there.  “The first way our world got bigger,” says Novak, “is that supply chain has taken over more and more jobs - travel and legal, for instance.  Although the span of what we now are engaged in varies by company, some procurement teams even handle negotiating for marketing staff.  J & J won an award for working in a new area.  They pulled together a multi-functional team and sat down with legal to tackle legal costs.”  The result?  Huge savings and legal was delighted.

Novak cites cost savings potential in litigation.  “Here’s how Johnson and Johnson won the award.  Typically the way depositions are handled is the law firm hires a court reporter to take notes.  But J & J took a different route – the sourcing team went to Kelly and outsourced the court stenography, which essentially cut out the normal law firm mark-up.”

“And the second way our world got bigger is geography.”  There has been general movement toward centralization in a lot of companies.  Frequently even regions went away, with the result that the Chief Procurement Officer (CPO) of a US company will have people reporting in from all over the world.  That’s another big change, Novak observed, to the idea of regions.   “One of the lessons,” he says, “is that there is still a place for a buyer at the local level.  For awhile everyone thought we would do away with local buyers, but there is no point in doing a master contract for the whole world.  What strategic sourcing pros discovered is that they could put people in local regions and they could buy off the contract.  They realized it was almost impossible for a centralized organization in New York City, for instance, to deal with all local needs.  So the second big change was to empower people at the local level.”

The third way our world got bigger is very important.  Now in many companies the CPO has ‘a seat at the table’ on the strategy board where management looks to them for innovation.  CPOs can truly really impact product innovation, for example, or they can identify how to take an existing product and add value, or even reposition a whole product.  The beautiful example here is Procter and Gamble’s Swiffer.  The story is that P & G want first to a Japanese company for this product.  After the Japanese said no, the parties worked out a licensing agreement.  Although Swiffer is a ‘not-invented-here-product’ it’s a big success generating huge profit.  I can cite other examples – Dave Nelson at Delphi, Deere, and Pfizer’s acquisition of Wyatt.”

Here’s another way of looking at the organizational shifts that indicate a rising of strategic sourcing – “Look at the number of CPOs who are also senior vice presidents.  The margin between Senior VP and VP is significant.  The VP marks the top of middle management, while a Sr. VP sits at a more executive level.  And we’re seeing more of this.”

Organization structures redrawn

Novak observed that a 16th century German engineer created the pyramidal structure to deal with managing an empire in which communications and travel over distances beyond 20 miles were difficult.    In the 1990s right-sizing changed the shape of the pyramid.  “Essentially we got a more pointy rocket ship with side wings – the CPO’s span was increased and we pushed the CPO closer to top of the point. But what we’ve seen subsequently is flattening as the base became much wider, with fewer people in middle management.  So now when we imagine the new pyramid, we have a wider base with the point not as far up the base.”

All these organizational shifts came from valid needs.  “Some of this comes from the 50s when a McKinsey study recommended that one person shouldn’t supervise more than seven people.  But as we saw a greater, more skilled workforce, the drive was to empower rather than manage.”  And all these shifts called for a senior executive who was challenged to become more of a leader than a manager. 

It’s been a disruptive 15 years for manufacturing as well as supply management as many suppliers, including a significant percentage of minority and women-owned suppliers disappeared into mergers and acquisitions or worse, bankruptcy.  The way American sourcing pros build a supply base is still very different, Novak believes, from the Japanese more long-term approach.  “If we compare Honda and Toyota and their style, they don’t stratify the same way.  Even the guy who cleans the offices at Toyota is treated like a valued supplier partner.  The expectation is that he will demonstrate continuous improvement.  It’s the Japanese way, but American companies don’t seem to be able to embrace this Japanese way.  As they rationalized their supply base, they broke it down into three tiers.  The top twenty – thirty are treated like the Japanese – they want the supplier to be profitable, they are strategically important, the customer expects them to bring innovation, they may ask for design help.  They may not insist on annual cost reductions, but they will expect cost savings ideas.  But what’s the American approach?  I think it’s not in our DNA to expect to do business forever with Joe the office cleaner.   The difference isn’t that the Japanese would never change a strategic supplier, it’s that they do it seldom, and with great care.” 

What are next steps ahead for strategic sourcing?

The US recovery is at risk because 22% of our exported manufactured goods go to Europe, and with Europe’s lagging economy, Novak has heard that the forecast could drop to 12%, “and that could put the US back in recession. But our report on business (the monthly ISM Report on Business) doesn’t show us headed over the cliff soon.  So far demand in Europe hasn’t tanked.  Keep a watch on export orders,” he warns.

It’s a great time for people looking to build careers in supply chain, because as the field becomes more strategic Novak believes it is unrealistic to transition tactical people to be strategic.   “If you have some experience and an MBA, it’s a good time.”  And there will be room, because fifty-three percent of the US workforce, largely baby boomers, is eligible for retirement.  Skilled trades are a real problem – with all these trades people eligible for retirement, who will replace the electricians, the pipefitters?  There is no easy answer.  Although there is enormous excitement around the U.S. re-shoring drive, our lack of trades people, particularly tool and die makers, is slowing it down.  Where are they going to come from?

There are other indicators that we should watch.  “Remember,” Novak warns, “One month does not a trend make.  One of our indicators in manufacturing is new orders.  It’s a good predictor of what’s coming – also supplier deliveries.  There is an inverse relationship – the slower the supplier deliveries, the more expansion they are experiencing.  It means suppliers are having difficulty meeting demand – they have cut so many people, it takes time to get capacity back, and there is the basic question of how to ramp up.  During this economy we’ve had many manufacturers hesitate to invest in a new plant or a third shift.   So I look at deliveries, new orders, export orders and overall PMI.”

IT is also a bigger piece of sourcing’s challenge.  Novak advises caution.  “Implementing huge programs like SAP there is a tendency to expect these solutions to solve all problems – they can’t. Do your best to alter the processes rather than alter the software, because when the next version comes out, a lot custom code breaks down.  So to the degree that you can make your processes match the software, you’re better off.  It’s tricky - you’ll have to select someone as the arbitrator of that, someone who is empowered with strong management support to say “no” to special requests, someone who is responsible for the implementation.”

If ISM is the premier supply management professional group, what does that tell us about integrating the enterprise, or what Emu calls “putting the pieces back together again, baby?”

The membership numbers are surprising:

ASQ (American Society for Quality)                                                                         80,000

ISM (Institute for Supply Management)                                                                     38,974

The American Production Inventory Control Society            (APICS)                           35,000

Society of Manufacturing Engineers (SME)                                                               24,000

The Council of Supply Chain Management Professionals (CSCMP)                               8500

Assn. for Mfg. Excellence (AME)                                                                               3781

Warehousing Education and Research Council – WERC                                             3000

                                                                                              Total                     194,474

Although there are other groups actively representing and recruiting manufacturing, supply management and distribution/logistics professionals, it’s surprising to see that considering the 11,000 companies and twelve million people in the US (not including the rest of The Americas) involved in manufacturing and supply management, these membership groups represent a small proportion of the population.  We’re going to need a bigger boat. 

Patricia E. Moody

copyright 2012

***