Executive Interview:  Aerco VP Tony Laraia and ISM's Norbert Ore talk Spend Management

                          QUESTION OF THE DAY:  Is is possible to do JIT/Lean in production and  still get clobbered by purchasing?                           Jimmy Anklesaria, a great strategic sourcing consultant and teacher, and one of The Mill Girl's book Agency clients,

                          formed a new LinkedIn  Group in which he posted this comment:

                                           "Price is just ONE element of cost and even within the price there are FIVE cost elements. Managing cost is not that difficult once a customer UNDERSTANDS the elements of total cost, identifies the key cost drivers and then develops strategies to reduce, change or eliminate those activities that CAUSE cost in the first place. Sadly, too many people in Procurement are too focused on taking price as a whole number and then beating a supplier down from the quoted price. I always believe that a percentage off a wrong number is another wrong number."  The Mill Girl responded:

Spend Management – What Is It and Why Is It So Damn Important?

     Spend Management is about cost management, the cost of goods sold line item that is deducted on the income statement from revenue to produce profits.

Cost of goods sold includes materials, labor, energy, travel, communications, marketing – all the direct and indirect costs that go into a product or service. What if a company has pushed as hard as it can on price increases or growing its markets and new product lines? Does that mean it has reached a profit plateau? Or might there be another way to approach survival in a limited growth global market?Well, one approach that’s been proven by companies such as IBM, Motorola, Hewlett-Packard, Apple, Waste Management, John Deere and others, is the powerful keystone of strategic sourcing called spend management. Spend management groups costs into manageable categories – hence the term category management used by many procurement operations – such as chemicals, plastics, steel, transportation – and breaks down all the elements that have historically affected those costs. In some instances spend management covers risk assessment and future forecasts for that category as well, but not all supply management operations look ahead to forecast future category prices. The spend analysis we’re talking about can be as simple as a spreadsheet or pie chart that lays out where the money goes. On the heels of that analysis of spending one can do audits of supplier contracts, for instance, or invoiced prices and payments. Pick one commodity to start with, sample costs and actual receipts against contracted quantities or purchase orders, and see what pops up. Chances are you will find opportunities to fix errors, or revisit quality and price agreements. But for deeper, more rigorous and repeatable spend management successes, you’re going to need software assistance because all the information for on going disciplined spend management cannot be squeezed into a massive spreadsheet. What about the other 80%?

When companies only focus on production or final assembly as their main cost reduction target, they are missing “the other 80%.” In automotive, for instance, where 80 – 90% of the spend goes to suppliers, leaving 20% for in-house assembly, it’s so clear that controlling costs and quality at the supply base is key. But how much easier is it to tackle 5S improvement and kaizen events, particularly if you are a manufacturing manager with no control over procurement, than to go after the numbers that lie in that big 80% chunk of the spend?

Good procurement operations, as the late Jerry York proved at IBM (see Lou Gerstner’s Who Said Elephants Can’t Dance?) can, however, save your company. What York did with IBM’s spend using analytics and West Point-style leadership, is different from what we use when we assess manufacturing operations. In spend management we are less concerned with mapping production flows and process observation and more concerned with finding the numbers behind the buy, and using sound analytics to show how the money is being spent. In companies that compete on global markets for precious commodities like copper or wood pulp, for instance, .it pays to have purchasing pros on staff who think like Wall Street commodity traders.

Let’s look at two Spend Analysis and Spend Management resources:

1. Spend Analysis, The Window into Strategic Sourcing, by Kirik Pandit and H. Marmanis 

(J. Ross Publishing, 2008)

Authors Pandit and Marmanis, formerly with Emptoris, a Boston-based software 

provider, assembled an extremely detailed guide to analytics in this book. 

Readers will find the math behind the concept, as well as case studies from 

the field illustrating just how spend analysis and spend management work. 

Beyond supplier consolidation, the first step in strategic sourcing, the 

authors provide graphics that illustrate actual spend 

analysis examples.  

Caution – the authors frequently use the term spend analysis to include management 

actions that would typically be taken after the analytics are in, when its time to 

tackle cost savings targets like 5% or 20% annually.   I would call this execution 

activity spend management; although they outline eight steps to complete a successful 

spend analysis program, they really are talking about spend management here:

1. Set objectives

2. Lead from the top

3. Establish a focused center of excellence

4. Carefully evaluate choices (commodity schema, data enrichment)

5. Take a limited-scope phased-rollout approach

6. Know your data

7. Ensure that technology supports business

8. Align the team to support the organization

(Spend Analysis, The Window into Strategic Sourcing, Pandit and Marmanis, J. Ross 

Publishing, 2008, page 47)  

Read this book if you want to take costs down in a deliberate and predictable

 way that goes beyond squeezing suppliers for annual cost reductions. Anybody

 can take 3 – 5% out annually just by paying attention, but if you want to get the kind of 

returns that IBM, Apple and Honda consistently achieve, you’ll have to focus 

on the 80%, the big numbers resident in your corporate spend.  

If you want to transform purchasing from a traditional paper processing operation to one that drives profitability, this book won’t give you all the answers to how to do that transformation and how to structure your organization, but it will give you a solid and detailed picture of effective spend management within strategic sourcing.

When managers at top companies like Ford, Honda, Toyota, HP, start to look at where 

their money goes, they focus on areas that they know control 80 - 90% of their spend. 

Spend management and spend analysis go wide and deep, way beyond the 

single-digit savings so arduously sought in many manufacturing focused lean 

initiatives. But to do good spend management, as Dorian Shainin hammered into

 us at Rath & Strong, "you must let the data lead you." That takes solid 

analytics, comparative cost numbers, some digging. Customers in automotive, 

for instance, should know better than their suppliers when they design a 

new vehicle, what the exact costs (the Should Costs, or Target Costs)will be

 for labor, materials, rework, scrap, etc., BEFORE they release a design to 

production where it's too late and too hard to achieve significant cost 

savings. Spend management is not lean purchasing, it is detailed knowledge of

 costs. That's why my book partner Dave Nelson and I want to see more and more of these 

books that offer great approaches to the analytics. There is no other way to 

achieve significant, lasting, double-digit and deliberate cost reductions. 

2. The Big Squeeze, Ten Ways to Cut 10% of Your Company’s Expenses Right Now!, 

Oaklea Press hardcover, iUniverse paperback 2011

And now for something entirely different…  At less than 250 pages including the Appendix, this business novel is a painless and quick way to experience spend management from the perspective of a fictional beleaguered corporation, United Manufacturing, that is struggling to compete.  Although The Big Squeeze is a business novel, the contributions from real experts in supply management, strategic sourcing, packaging, logistics, distribution, will help you take 5 – 20% out of your annual spend.   Here’s an excerpt from The Big Squeeze that lays out the 12-step Strategic Sourcing process:

1. Analyze the spend

Determine the spend by commodity and in total – what we buy, from whom, in what 

quantities, at what prices and when.  This information is only partially available, 

but Accounts Payable invoices and shipping receipts, as well as original contracts 

and closed orders, will provide most of the information needed to reach an approximate 

total of United’s combined spend for key commodities.

2. Establish cost reduction targets

This year, United’s CEO set a Year One 15 percent cost reduction target.  The 

year-to-year target should drop into the single digits, depending on gains achieved 

for Year One.

3. Audit

The prices and quantities agreed to in contracts, particularly older ones may not be 

the ones that appear on invoices and payments.  A sampling of all receipts and payments

to compare against contracts will highlight discrepancies and immediate savings 

opportunities.

4. Supplier Selection

United’s supply base numbers over 30,000 suppliers, many of which are used infrequently.  The commodity team will review current supplier performance – quality, delivery, pricing and engineering support – sort the supply base into suppliers to retain, suppliers to cut, ad suppliers for whom the company needs more time or data for a decision.  For items outsourced or contracted to a third-party provider, these suppliers will drop off United’s supply base.  The commodity team needs supplier performance history relative to price, quality, and on-time delivery ad subjective partnering/alignment criteria.  Key questions during the selection process are: Are they suppliers we want to continue with?  Are their prices competitive with other suppliers?  Do they offer potential for growth with us?  For each major commodity, United will buy from no more than three to six suppliers;

5. Supplier Survey

United’s sourcing team needs to understand if the company is giving suppliers what 

they need – information, technical assists, forecasts – to do the best job for the 

customer.  The supplier survey, conducted at least once a year by a third party, asks 

suppliers to evaluate United as a key partnering customer relative to communications, 

pricing requirements, etc.  See Breakthrough Partnering, Patricia E. Moody, John Wiley 

and Sons/omneo, 1993, for Motorola, GM/Williams and Solectron supplier surveys.

6. Site visits 

As the souring team narrows United’s supply base to a smaller group of high-performing 

supplier/partners, commodity managers will contact suppliers or consortia/outsourcing 

specialists and begin consolidated volume discussions based on United’s commodity plan 

and its ongoing requirements for pricing, technology and scheduling.  For commodities 

representing significant price or quality risk to United, commodity managers will visit 

suppliers at least once a year.  Each new supplier agreement will be preceded by a site 

visit.  For example, because some of United’s plastic parts are highly engineered for 

United’s specifications, an engineer will visit supplier candidates, review engineering 

requirements and evaluate that supplier’s technology and capacity capabilities.

7. Leverage the spend

We are consolidating along two paths:  (a) by reducing United’s supply base from 30,000 

to less than 1500 and (b) by reducing the number of buyers inside United who can 

purchase material to one expert buyer, a commodity manager, per commodity group United

will centralize and consolidate all buying and in-house manufacturing.  United has 

decided to outsource most manufacturing, which increases purchasing responsibilities as 

commodity managers source and place United’s basic assembly or with subcontract 

manufacturers.  Manufacturing will report to the CFO or the new CPO.

Commodity managers will complete a written commodity strategy for each commodity, 

to include future outlook.  Commodity managers on the team who reach savings goals will

 be eligible for a bonus savings pool; managers that beat market prices will also be 

eligible for a new market price savings pool.  There is a three-to-one return on the 

investment in central commodity managers; first year savings from MRO will cover the 

initial outlay.

Centralizing the buy may be United’s most difficult change, but it is essential for 

nearly every commodity, from manufacturing components to pencils and scratch pads.  

United Manufacturing has been operating with a very decentralized approach to buying.  

Every division, every product line and market segment, every production line and 

shipping area, has been buying its own favorite materials.  In some areas there are 

signature limits on what a requisitioner can spend - $5,000 and under – but not even 

that general rule was steadfastly followed.  And of course, this explains how United 

accumulated over 30,000 – and counting – suppliers from all over the world; every has 

his favorites.

Engineering, for instance, likes to buy plastic parts from Acme Speed Molding because 

Acme can deliver small quantities quickly for a premium.  Production, however, buys 

huge volumes of plastic components from a dozen generally cheaper, global suppliers.  

Field Service buys aftermarket parts from yet another supplier to support its service 

requirements.  And some buyers have special relationships with local sources that they 

feel a need to protect.

Other requirements data need to be collected and confirmed – Field Service, for instance – and

this will take six to eight months to roll into overall requirements.

All of United’s unconsolidated buying has quietly accumulated higher costs.  The best 

way to consolidate a scattered spend is to limit all buying to a central buying group

using a single data base, reporting in to the Chief Procurement Officer, under the CFO.  

This is how Gene Richter structured the procurement operation during IBM’s turnaround.  

Working under CFO Jerry York, Richter saved IBM $12B.  

No checks will be cut for payments without commodity manager approval; this policy is supported and monitored by United’s CFO.

For commodities with no data in the purchasing central database, United will hire 

two summer interns who will dig data from the Accounts Payable files (or suppliers 

if necessary), to establish prices and quantities, suppliers, etc.  As an interim step, 

the information will be collected on Excel spreadsheets; spreadsheets will be replaced

 or supplemented by spend management on-demand software (cost under $50k).

United will consolidate it s spend commodity by commodity, starting with MRO, telecom, 

plastic injection molding parts, electronics, Transportation/logistics/Packaging/

Distribution and Benefits.  These groups should represent about 60 percent of United’s 

total purchased spend.  We will expand the number of commodities to cover 80 percent or 

more.

For example, all plastic injection molded parts with be planned and bought by our 

commodity manager for plastics.  No other purchases will be approved or paid for if 

they are made outside Dave’s commodity plan.  All requirements for these parts will be 

reflected in the planning system, including Field Service quantities and engineering 

prototypes.

8.  Place the business

There are three ways United will place its commodity spend – through the normal RFP 

and request for Quotes process, by outsourcing the spend to a third-party provider, 

such as subcontract manufacturing, or by an internet auction.  Some commodities, such 

as cleaning materials, can be sourced through a one-time internet auction.  Depending 

on the results of the commodity research, United may contract all MRO office supplies 

with an on-line distributor that meets our savings goal and offers an on-line catalog. 

The second buying process United will sue for certain commodities, such as travel, 

telecom and health insurance, is to engage an outside consultant to set up the review, 

define needs and help with provider selection.  Projected savings from working with an 

outside expert will cover startup costs and cut three to six months from the startup 

time.  We want to use this help to free up immediate savings in these areas while we 

dig into data to find more difficult savings in engineered and other production parts.

The first-month return will cover the initial setup investment, and the plan is to 

ask the consultant to perform a yearly “health check” contract supplier review for 

these commodities.

9.   Contracts

United’s current procurement arrangements include an assortment of verbal and written 

contracts,, some as many as 24 pages long.  The only way United can maintain the kind 

of spend management information that will meet ten to 15 percent savings goals and 

establish baseline data points is by consolidating all buying deals into a United-

approved contract format.  Strategic Sourcing and Legal have developed a revised United 

standard contract, an on-line, three-page document that we will review with all new and 

old key suppliers.

10. Verify, track and control

Audit the savings process; verify cost savings, track relocation of savings (reduce 

budgets), and continue to monitor purchasing activity on new agreements.  For example, 

if Sourcing secures $50k savings on travel expenses, the travel budget should be 

reduced by $50k to maintain the gain.  If the $50k savings simply move from the travel 

budget to another line item, the savings will be lost, and Commodity Management will

 not be able to maintain ongoing savings in that category.  It is the responsibility 

of the commodity manager to confirm that negotiated savings appear on actual payment 

transactions.  On shared savings from the suggestion system, or possible supplier 

development improvements, the CFO requires verification of savings.

11. Commodity Plan

Each commodity under control of Strategic Sourcing will be documented with key supplier 

and market information in the written commodity plan.  The commodity plan basics include

metrics on current suppliers, ongoing requirements and site visit notes.

United will track performance metrics for current suppliers – total dollars spent, quality and on-time deliveries, pricing issues, current and future requirements, future technology trends,

cost breakdown models where available or standard cost data or negotiated prices.

Initially, not all this information will be easily obtained, because so much of

 United’s spend has been managed “off-line.”  Where system data are missing, Accounts 

Payable or Receiving files will furnish reasonable starting information on actual bu

United will not always award business to lowest-cost providers.  For some products, 

United will be looking for technology leadership from suppliers, not simply lowest price.  The commodity plan will identify key technology needs and align them with supplier selection strategies. 

For plastic injection molded parts, for instance, the manager will prepare a 

requirements summary extended out through the next two years.  The requirements summary 

gives suppliers an idea of gross quantities and items needed, without attempting to 

define all the specific forecasting flavors beyond lead times.  Essentially, it is a 

capacity reservation for the supplier.  Next, he will review current contracts and 

pricing, and based on market index projections, he will consolidate and put the 

business out to bid.  Other commodity managers, depending on their commodities, may 

use an outsourcing provider/consortium or an internet auction to identify and contract 

with good suppliers.

The Commodity Manager and his Engineering counterpart will be available to answer 

supplier questions.  We expect to receive quotes within four to six weeks of most RFQs. 

 He will review any unanswered questions and make a recommendation for his primary and 

secondary supplier sources, in conjunction with Engineering input.

12.   Set new cost reduction goals, and review new supplier performance data

This is an iterative process that requires annual review.  Expand to new commodity areas.  Initial savings from simply paying closer attention to buying patterns and working with good suppliers will get United ten 50 15 percent savings.  Sustaining the savings year after year will take United Strategic Sourcing into the next level of maturity.  To reach excellent or expert buying levels, United should be able to project and consistently achieve three, or five-percent-plus savings year to year.  We believe that for United, moving from its beginner’s level to expert operations will require good information, good people and better systems, including on-demand spend management software, as well as some optimization planning for Transportation and Logistics.         Copyright Patricia E. Moody 2011, all rights reserved.   

  

Aerco and other leaders practice Spend Management 

 Tony Laraia, VP of Operations at Aerco, where he owns manufacturing as

 well as purchasing, and former president of the Association for Manufacturing Excellence, believes that although “companies may not want to get into the commodities trading and futures market, which is complex and risky, they do need to manage how they buy metals.  Take copper for instance, which peaked in the last six months at $4.50 per pound, compared to $.60.   There is tremendous demand from places like China, where they are still building infrastructure, plus there is speculation within the Chinese government itself, and of course private entities, all buying up quantities of copper. So you end up with a lot of volatility. “

So how do we deal with more buyers in the game, and extreme volatility?  And 

what if you cannot automatically pass price increases down the supply chain to your 

customer?

Laraia explains that Aerco, doesn’t buy raw copper, but they purchase 

great quantities of tubing, castings, etc., several steps down the supply 

chain from the mine and the smelter.  The supply chain tends to mark up 

prices as the materials are worked into final form.  “It also increases the 

pain, especially if you  can’t just bump prices up.  And that’s the squeeze 

a lot of people get into.”

The lag effect and the amplification factor

Another issue related to the length and number of stops on a supply chain is 

what Laraia calls “the lag factor.”  Raw material enters the pipeline at a

 certain price and flows downstream, but a price increase doesn't’get to the 

end of the pipeline instantly.  So when the price drops, you get the lag 

effect, or people in the middle of the system have to get materials go at a 

loss, flows downstream.  It’s the amplification factor.  

Locking in contract prices, as Southwest Airlines has learned when it offered 

the lowest fares in the business, can hurt deeply when fuel prices shift.   

The other option to better manage the swings is for the C-level executives to

 be personally involved in major contract negotiations, especially over 

issues such as locking, where proposed contracts become complex.  

The New Precious Metals

Laraia watches copper, nickel, tin, bronze, brass and all associated alloys, and zinc.  

When certain commodities become what he calls precious and the consumption patterns 

change, some producers can look at substitutions to save money.  Where some companies 

may have been using stainless, for example, instead of copper, with copper prices 

rising, demand for stainless went up.  Mills built more capacity and that caused more 

shifts in the marketplace. 

Below the executive level, commodity managers must spend face-time in the field,

 Laraia estimates 1/3 of their time, building relationships with their major suppliers.

 Armed with good analytics, their objective becomes taking some of the volatility out 

of the company’s strategic sourcing.  

Negotiating other factors

At the other end of the market lie medical devices and their raw material suppliers.  

We talked with Kevin Meyer, president of Specialty Silicone Fabricators in the San Luis

Obispo, California Area.  At nearly 90% of their spend, silicone represents a huge 

buying challenge inherent with unpredictable yields and quality requirements one would 

expect in the kind of life-saving devices, shunts and pacemaker leads, for example, 

that few producers succeed in.  The company is bound by regulations inherent in medical

controls along with big liability issues that increase costs and the availability of 

few suppliers.  Strategic sourcing in this area is not without limits, but Meyer notes 

that “there are some things we can do, like negotiate the levels of service… And we

 spend a lot of time with suppliers.  Between our supply chain and quality and 

engineering groups, they are really a development partner.”  

Continuing to work closely with suppliers is key to leading the market because 

as Meyer notes, “Raw material suppliers are improving their processing ---but

 medical device design is moving faster than raw materials.”  

As president Meyer would like more predictability, more scheduling and delivery 

stability. But as customers become more global and with Asian markets exploding, Meyer 

admits that his company’s strategic decisions about where to locate production and raw 

material suppliers, will over the next ten years or less, become even more critical.  

“That’s a great challenge to have, a scary challenge,” he says. 

It’s all in the timing

Let’s look at another strategic sourcing example that exemplifies the challenge of 

spend management in critical commodity areas.  Derek Mulligan, VP of Supply Management 

at my old consulting firm Rath and Strong in Lexington, Massachusetts, was a supplier 

engineer at Honda, where he worked strategic sourcing problems of all types.  These 

days he’s consulting to global clients on spend management and strategic sourcing

 problems.  

Mulligan finds himself on long airplane trips that mirror the distance so many of our 

global commodities must also travel.  Working with an aluminum company in the Mideast, 

Mulligan discovered a case of momentary corporate anorexia that threatened both the 

career of the supply chain manager, and the profitability of the operation.  Confronted 

with a CEO who felt that inventory levels were too high. Mulligan looked at the numbers 

tracking inventories day to day and discovered that they were measuring the end of 

quarter value when a single boatload a day could swing inventory dollars millions either 

way.  When a shipment pulled up to the dock nine minutes before the end of the quarter, 

it was posted immediately to the books, and the inventory skyrocketed, at least 

momentarily.  

But the Mideast has risk issues that strategists want to be buffered from – piracy, 

weather issues, long distance cross-desert routes, etc., and one solution was consortia,

joining with other smelters to establish a buffer against which any member could draw. 

 On paper the idea had merit, but Mulligan realized that sheer logistics proved it

 unrealistic.  Clearly the answer was not going to be even less inventory, so Mulligan 

offered up two simple solutions for consideration, the first being inventory 

measurement over a moving average, in addition to end of quarter financial metrics, 

and evaluation of inventory in days of supply.  Mulligan is hoping that by measuring 

operating metrics that directly influence the smelters, he can offer another way of 

measuring inventory that won’t risk on-line operations.  It’s a challenge to consulting 

firms who fly in and fly out, leaving behind unrealistically limiting inventory rules,

 and that may not accepted among some consulting houses, but as a supply management 

professional who knows the pain for basing inventory buys on flawed global forecasts, 

 Mulligan believes that global supply risk has to be built into the formula.  “For so

 long,” he says, “we have been driving inventory down – Taichi Ohno said to do it 

until it’s painful, but we’re talking a global scenario, with large volumes, and huge 

risks, and on a financial basis it just doesn’t make that much sense to take inventories 

to zero at all costs.”

A little knowledge….

“It’s interesting because there are people out there who read enough to think they 

understand supply management, but they are not thinking about the particulars, about 

what we have to do.  They don’t think about what’s really going on here.”  He offers 

a pointed critique of this type of narrow corporate consulting – “they do an assessment 

with benchmarks of people, inventory, all the dry measures that have enough detail 

behind them so that at 30,000 feet you can look at the footprint.  But at the floor 

level, these folks aren’t going to reappear when you’ve shut down operations!  You’ve 

got to look at realistic inventory numbers – calculate the cost of running out, shutting

 down, starting up for overnight recoveries – it’s not cheap.  And it gets ugly.”  

Dave Nelson on consolidating the spend

Indirect materials can be an enormous source of continued savings.  Dave Nelson tells 

the story of Delphi’s experience with hundreds of packaging, mostly cardboard box, 

suppliers. When companies proliferate non-standardized specifications for this type of 

spend, the cardboard piles up on the floor, in trucks at the curb and in landfills 

while it increases trucking and storage costs as well.  But, says Nelson, it’s easy to 

fix.  “We reduced to one supplier, plus we had a method to cost out what a box should 

ost.  We just took our requirements and probably got as good a deal as there was out 

there.  You can save big money in the way a box is designed, but if your designers 

overspec packaging, by making the specs thicker than they need to be, for example, you 

need to reduce the complexity and standardize on fewer designs - take the weight out.  

Sometimes designers will specify a box that is stronger than what the truckers really 

need.  It takes a bit of analysis to find the answers, but if you dig, you’ll find the 

information.  There’s money there!”

Kraig Webber, category team lead for Packaging at Delphi, lives daily with the ups and 

downs of opportunities in this area.  “We work with yearly cost reduction targets,” he 

says, “and part of meeting the target is using value added/value engineering with the 

packaging engineers in plants. It works.”

For example, Delphi’s wiring harnesses used paperboard in the shipping box.  By going 

\to heavyweight paper, the company found double digit savings.  For corrugated pallets, 

the buildup pads on the feet,  they took out one layer in the wrap that acts as a foot 

in nine places on the pallet, and saved even more.  For partition assemblies Delphi is 

fitting more parts in the same pack.  Over-specification can be a problem here as well, 

and it’s hard to identify who specifically should be watching this area.  “Normally, the 

packaging engineer would be responsible, but with some production shifting to Mexico, 

we needed to do an analysis.  We have purchasing on the team so that we can negotiate 

pricing.”

Although engineering has their list of favorite suppliers, when purchasing gets 

involved from day one, savings result.  Webber sees continued challenges here, as 

packaging engineering’s reputation as “the red headed stepchild, a necessary evil,” has 

slowed progress.  “It’s the last thing everyone thinks about, but if it’s not there on 

time, or ergonomics become major issues, packaging can stop shipments.”

Guy Carter, President of The Carter Group, an Alabama-based placement firm, also speaks 

to the value of sound packaging in spend management.  When we asked Carter about the 

ideal supply management executive, he listed five to eight years of strategic sourcing, 

understanding how a commodity is manufactured, as well as who key sources are, costs 

inherent in the product, as well as market history.  “They don’t have to be engineers,”

 Carter advised, “but they do have to be analytical.  What we are seeing in most of my 

searches for high level executives – vice president of supply chain or chief procurement

 officers -  is they are extremely analytical, and they understand the entire food 

chain,  all the way through production on a global basis.  Not all industries have done 

that, but those that have figured it out are competing globally.  Industries that have 

lagged include utilities and healthcare.  We are going outside to find people for 

healthcare,” he noted. 

Carter echoed Nelson’s comment on packaging opportunities.  “In chip manufacturing and 

consumer audio, we see companies that have been working well on packaging.  It’s a place 

where they can save money.”

Norbert Ore, now a supply management consultant helping clients with consulting and 

training in strategic sourcing and commodity buying, for sixteen years chaired the 

Institute of Supply Management’s Report on Business.  As an executive with Georgia 

Pacific he trained and promoted good purchasing people.  When asked what he thought 

would make an ideal buyer in hot commodity markets, he responded, “The ideal buyer of a 

commodity would probably have to spend half of their career in Engineering, 

understanding the use of the commodities, their technical aspects, and this person 

would probably also have an MBA.”  

I’ve been thinking a lot lately about the separation between manufacturing people who 

are preoccupied with Lean, and Supply Management pros who get involved in manufacturing,

supplier development, engineering, and other areas that contribute to cost.  It’s not 

clear to me why the chasm is so wide and deep and I’ve begun to think it can be 

attributed to organizational structure and history.  Could it be that purchasing 

professionals come up through manufacturing, but manufacturing people have avoided 

purchasing, or perhaps the two functional hierarchies report up to different C-level

 managers?  It may be that what we are seeing is two totally different cultures, 

with different languages, different tools, different creeds and missions, different 

performance measurements and reward systems, and different leaders.  Perhaps that 

explains part the disconnect.

Ore has, however, worked on both sides of the fence and takes a higher level 

view of both these areas’ potential business impact.  He says that “the ideal commodity 

buyer probably started out in manufacturing, and then got involved in purchasing and

 found they liked it!  The worst part about purchasing is they come into it, fall in 

love with it, and then they stay – and many professionals are quite often capable of 

staying with that.  They like what they are doing, and they trade off promotion to do 

what they like.  We are low in compensation in some places.  They had to have found 

that the negotiation process is something they enjoyed being involved with.  They would 

have an ability to manage conflict, and those aren’t necessarily engineering traits, 

although they would probably be an engineer or someone with a technical background, 

like a chemist.”

“It takes both minds,” he said reinforcing the idea that the best people have both 

manufacturing and procurement interests at heart.   And according to Ore, it is possible

 to develop a new professional with both strengths.

“I had a large group of commodity buyers, and they tended to favor engineering or a 

strong technical background.  I knew I could teach them the commercial side of things.  

There isn’t a mold that we make, it’s more about the skills - good commodity skills, 

understanding applications on the shop floor and understanding the commodity supply 

chain.”  

We wanted to focus in on his experience with pulp and paper, a commodity market that 

has gone global with big implications in its price and supply swings for packaging and 

logistics costs.  Although the industry has scaled up since it’s beginnings in the rag 

paper mills of the 17th century, and new processes and chemicals are in play, it’s a 

great study on how to buy during volatility shifts.

“When I was with Georgia Pacific, there were big challenges in pulp and paper then as 

there are now.  And here’s how I approached the commodity markets.  The CEO would say, 

‘Can you guarantee me that we are paying the lowest price in the marketplace of 

anybody?’  And my response would be,  ‘I can guarantee on the day that I made the deal, 

I got the best price of anybody.’  But circumstances change – that’s one of the big

 issues – you can’t just make the deal, you must be aware of changes in the marketplace,

 because once you make the deal you’ve lost one of  your most key advantages, the

competitive environment.”

Ore is telling us that volatility offers opportunity for those buyers who are not 

locked in, but managing the ups and downs is not for the faint-hearted.  That’s where 

analytics and deep market knowledge come in.  “You must be wired into the marketplace,” 

he says.  “For copper, silver, and gold, for instance, it’s easier, because these are 

very liquid commodities and we can see what’s going on.  But one of the key commodities 

in the pulp and paper industry, for example, is caustic soda.  Caustic soda is one of 

the more unique commodities because during the conversion of chlorine into PVC, for 

every molecule of PVC you get, there is 1.1 molecule of caustic soda.  And when the 

housing market is strong, basically to produce caustic soda you have to produce PVC.  

The market has it’s own limitations on supply and demand – if the demand for PVC is low,

 the caustic soda will be high demand.”

Ore pays close attention to indicators such as the market Index.  “I think a lot of 

commodity buying is done on Indexes.  My objective was if I was buying off an index, 

to lag the market.  When it’s going down I want to lead the market, because 

historically the sellers are much more aggressive as its going up, but buyers are

 not as aggressive as the market is going down.  Good commodity buyers work really

 hard to beat the ups and downs. “

The pulp marketplace has experienced big shifts as many paper producers opted out 

of owning their own forest preserves, along with cutting and milling operations, 

in favor of buying pulp and chemicals from specialized producers.  Pulp is now a 

hot commodity fought over by big multi-national paper producers.  Ore sees the market 

in continual flux, “The dynamics of the pulp market are challenging, and a lot of 

people have chosen to get out of it.  There are environmental issues, for instance, 

that affect supply.  But then you have the Brazilian suppliers like Aracruze that 

can produce pulp with shorter growing cycles – they’ve jumped into the market and 

had the advantage of cheap fiber.”

Pulp

Environmental regulations have favored offshore producers, says Ore.  

“When we were doing environmental pullbacks, they have been aggressive.  

Procter and Gamble and Kimberly Clark got out of the pulp businesses – they are 

huge in tissue and towel plus diaper products, which contributes to growing demand.  

… A weak dollar helps also.”  

Focusing in on the markets may mean that category managers concentrate on fewer 

strategic buys, says Ore.  “Typically in most paper companies there is a chemical buyer,

 usually working four, five, six or seven key chemicals such as sulfuric acid.  The 

buying process to me starts with first understanding the spend - what are the key 

chemicals, where are they used, how are they used, the usage history, what are the 

specifications, what are the problems.  Buyers frequently have had to deal with 200 or 

more plant locations and every one of those locations has individual needs that could 

be anything from delivery times, like no delivery trucks in the yard until 2pm, for 

instance.   My advice to commodity buyers is to first understand yourself and all your 

own requirements before you start worrying about the marketplace.” 

It’s not about watching the numbers on a screen however.  Ore believes that great 

commodity buyers enjoy a lot of supplier face time as well.  “Secondly, to learn about 

the marketplace, you have to talk a lot to the suppliers.  At Georgia Pacific six 

months before a contract was up, we would invite the incumbent supplier to make a 

proposal for a one, two, three, or five- year extension of the contract.  That gave 

commodity buyers enormous new insight into the marketplace.  From there we could begin 

to make some judgments.”

“We would next bring in three or four other suppliers and ask each to give their 

viewpoint on the market.  Each supplier had sufficient time to do a presentation on the 

status of the market.  Whatever point of view I had developed starting with the incumbent, plus a few more, would give me five or six views – at that point I would have developed the advantage because each supplier would only have its own perspective.  Getting multiple viewpoints compensates for loss of competitive edge.  In a three-year contract, for example, we would be constantly talking with suppliers, trying to get as much market intelligence as we could because it’s critical for commodity buyers to understand what’s going on.” 

Creativity trumps leverage…. sometimes

“Where bigger companies have price and contract leverage, I believe in using creativity.

 In the steel market, for instance, one of the tougher markets, we find many buyers 

with little leverage.  That’s where creativity  - knowing the market, the real specs – 

counts.”

“There are also buying opportunities in logistics and transportation.  

With of the unique nature of commodity buying, transportation is a major issue because 

certain suppliers are not freight effective.   Here again, solid analysis and creativity

 helps clarify the buyer’s decisions in logistics providers.”

In the simmering dispute between traditional Cost Accounting advocates, lean 

supporters of Lean Accounting, and commodity experts like Ore, measurement problems 

continue to surface.  “Cost accounting won’t always provide the right answers because 

cost accounting is generally a figment of somebody’s imagination. Costs are often 

derived numbers based on spreading overhead and other costs over various products - 

these numbers do not accurately reflect the true costs associated with products.”  

“A quick story illustrates.   We were working with a company under a government 

contract that required complete disclosure of their cost system.  Well, I finally 

decided they didn’t have a cost accounting system – this was a $30M per year furniture 

supplier - when the manager said, ‘Accounting comes in on Thursdays!’”

“How do you know when to raise prices?” I asked, to which he responded, “Well, at the 

end of the year, I look at how much money I made, and if I think I made enough, the 

prices stay the same, if I didn’t, we raise them!”  

Former ISM Chairman and supply management executive consultant Dave Nelson says 30 – 40%

of companies don’t know their true costs, although certainly Toyota and Honda come 

closer to it than anybody.”

I’d like to think there is a Rosetta stone out there forming from the shifts and 

bubbles stirred up by this on-going cost accounting argument, a magic tablet or 

algorithm that will convert calculated costs to true costs to profitability factors. 

 It could be that the software providers will drive the solution.  But at some point, 

all the skills great procurement buyers have developed around should costs, target 

costs, real costs, etc., should be as realistic and accessible and usable as 

traditional cost accounting systems have become to everyone in manufacturing.  The 

question is, is there money in it?

In depth market knowledge from the suppliers themselves

Another Cost Accounting critic