Continue to Evolve Your Vendor Code of Conduct

After you publish your Vendor Code of Conduct, is your work done as the operation leader? Is ethical sourcing is just words, or actions?

At Jon Renau, we are continuing evolving our vendor code of conduct to respond to the evolving industry trends, because we found strengthening our vendor code of conduct is the most proactive approach that not only benefits our team but also contributes to the well-being of society. By incrementally improving the requirements, we’re not only setting higher standards for the vendors but also fostering a culture of responsibility and accountability throughout our supply chain.

Here’s how we permeate the value of vendor code of conduct into vendor partners and contribute to society at large:

Compliance with Regulations: First and foremost, ensure your vendor code of conduct aligns with relevant regulations and industry standards. By requiring vendors to comply with legal requirements and industry best practices, you demonstrate your commitment to operating ethically and responsibly.

Ethical Sourcing: Encourage vendors to adhere to ethical sourcing practices, such as fair labor standards, environmental sustainability, and responsible sourcing of raw materials. By promoting these practices, we not only mitigate risks associated with unethical behavior but also support the well-being of workers and communities involved in the supply chain.

Collaborative Partnerships: Foster collaborative partnerships with vendors based on mutual respect, understanding, and shared values. Work together to identify areas for improvement and support vendors in implementing necessary changes to meet the requirements of the code of conduct.

Transparency and Trust: Emphasize the importance of transparency in business practices and building trust between you and your vendor partners. Clear communication of your expectations regarding ethical conduct and social responsibility helps vendors understand their role in contributing to a sustainable supply chain.

Continuous Improvement: Emphasize the importance of continuous improvement and ongoing evaluation of vendor performance. Regular audits, assessments, and feedback mechanisms help identify areas for enhancement and ensure compliance with the code of conduct.

Positive Impact on Society: Highlight the positive impact of adhering to the vendor code of conduct on society at large. Whether it’s promoting human rights, protecting the environment, or supporting local communities, emphasize how responsible business practices contribute to a better world for everyone.

Market Differentiation: As an industry leader, we position our operation team as the leader in ethical sourcing and responsible business practices. By showcasing our firm commitment to high standards of conduct, we believe we will differentiate ourselves in the market and attract like-minded customers and partners.

Overall, by strengthening our vendor code of conduct and permeating its value to your partners, I believe we not only mitigate risks and ensure compliance but also contribute to the broader goal of building a more sustainable and ethical business ecosystem.

Create an Effective Partnership With Your Shared Service Vendors

Creating an effective partnership with your shared service partners requires a clear contractual foundation and ongoing vendor management effort. In this article, I plan to summarize many different models of contractual structures that I had experienced in the past, despite some of these models did not exist 10 or even 5+ years ago. Because these different models were essentially created to purchase intangible services based on customers’ needs, in my opinion, they can be shaped in almost any way or format so long as both contractual parties are willing to craft an agreement for it. But very importantly, these evolved iterations have profound implications on the ongoing vendor performance management and ultimately the relationship between shared services customers and the vendor partners.

Staff Augmentation

When business process outsourcing (BPO) started about 15~20 years ago, the basic model was “staff augmentation”, essentially the service providers would provide the clients a “body-to-body” replacement, where as a simple example, an on-shore resources in the high cost region can be replaced by a near or off shore resource from the low cost areas and in this case, the customer would pocket or share the labor arbitrage difference between resources resulted from the geographic and cost of livings, while maintaining the same level of head count and achieving the same level of services.

So staff augmentation became the very basic outsourcing technique that is used to essentially “staff” a business operation. The discovery process typically involves in evaluating the existing staff requirement and then determining if same or additional resources are required from the low costs service providers.

Managed Services

As shared service model getting more mature, a better defined shared service proposal is more required to respond to a business objective, but not just staffing needs. Then a managed service model emerged. A master service agreement (MSA) between a services provider and a client organization needs to be established before the service is provided. This agreement will typically outline the scope of service and agreed upon service level (Key Performance Indicators). 

More than often, both services providers and their clients would quickly find out that the service levels are not well defined, nor measured when the business process was handled internally. As a result, the service providers and clients are always going into the debate on what is in or out of scope, when a part of the business process is outsourced but a part of the business process continues being handled internally and hence how the interface or handshake would happen between the shared service provider and the customer.

Capacity Based Agreement

Capacity-based contracting refers to a contractual approach where service providers are engaged based on their capacity to handle a certain volume of work or transactions, contrasting to a fixed price for services at a managed service level, or just flex with the number of staff.  Capacity contracting approach allows customers to align their service needs with the provider’s capacity to deliver those services at the most effective way that provider is agreed to. The service provider’s capacity and resources become a key focus in this type of agreement. This can be particularly useful in dynamic environments where the demand fluctuates from the customer.

Capacity contractual model can help organizations achieve more flexible and responsive service arrangements, as capacity-based contracts can adapt to changing demands more effectively than traditional staffing or a fixed-pricing managed service agreement.

After all, how do we decide on what model to use, here below are a few trade-off decisions that you have to think through:

People vs Control = People First

The belief in the shared service industry is it is ALL about people, because by the end of day, services are provided by people. Then the question becomes how these “people” are recruited and trained, developed and retained, and if they turn over, how do we replenish with new talents and hence create a talent pipeline.

From there, I found there are so many models were developed to cater to different customers’ needs, from managed captive to full captive, internal recruiting or recruitment outsourcing, build, operate and transfer (BOT) and so on and so forth. As a part of continuous staffing, a customer can outsource end to end recruiting process to a service provider or a 3rd party recruiting firm. Service providers can offer a shared and scalable model, process excellence, cost savings, technology stack, market intelligence and predictive talent analytics to help customers find the right talents.

These service model can be customized with a specific set of services to directly address your customers’ needs. Based on hiring needs, changing requirements and recruiting challenges, recruitment service model can be scaled up or down quickly and provide customers agility. But arguably, the agility comes with a cost premium (in the short term). So as a trade-off, when the high flexibility is provided to customer, the service provider will charge premium, and in the meantime, the people development and loyalty will be more leaning toward the service provider therefore less of control by the customers side when service provider play more critical role in the entire people operation.

On the opposite side, if you are operating a full captive model with a full internal talent process, obviously you would avoid premium charges and have full control of the staffing process but operating a full employee model with much lesser flexibility.

Simplicity vs Flexibility

As shared service model getting more complex, it will inevitably post challenges on the contracting and also the on-going vendor performance management.

Staffing model is simple and flexible, it starts from customer sends out a job description and number of resources needed. The performance measurement can be as simple as the speed of hiring. Whereas managed services can be a complex and less flexible because it will entail how performance is measured, bonus or penalty when performance measurement is met or missed. Managed services typically involves a longer period of services also, since there will be ramp up and ramp down, and learning curve, etc.

After working in the industry for decades, I observed customers and service typically starts from something simple and easy to comprehend, and as services getting mature, there will be more discussion about managed services, with exception in the past few years, I also found when the services and agreement getting too complex and less flexible, many customers and service provider will choose to resume to their original model and move back to the basic staffing model, because of its simplicity and flexibility.

Value Creation

When I create this shared service model framework, I drop the various service model into 9 boxes depending on where the “value creation” resides, in another word, if the value creation is more or less toward the service providers or the customer side.

In these 9 boxes, if customers want to place more control as to create higher value for its OWN customers, customers can deploy a full captive model but losing certain level of flexibility; where if service providers want to place more control as to create higher value to themselves and able to develop and retain their own staff and afterwards share these resources whenever necessary to different clients when a client’s work is complete, a full flex model by their own retained staff can be used to meet these type of customers demand.

In summary, a model must be tailored to meet both customers and service provides’ goals, and afterwards responsibilities and risks are shifted accordingly based on the value creation trade-off decision is made.

Technology Reliance 

In this “machine learning and artificial intelligence” getting so more popular days, the technology dimension is very critical in this shared service model decision framework.

In practice, deployment of technology can help improve productivity and reduce on going operation expense, but the development and implementation can be capital intensive and very expensive. Therefore many small or medium size of customers tend to leverage service providers to develop those technology, and as a trade-off, this strategy would leave more reliance to the service providers. While at the same time, many large or sometimes mid-size customers would develop the technology by themselves, therefore reducing its reliance on the service providers, in many cases, because they have technology replace labors and some outsourced workforce can even be brought back in house because the new talent requirement is elevated and the number of staff required is significantly reduced.

With all that said, machine learning and artificial intelligence is on its evolution journey, we just had it started, it is too early to tell which direction it leads us to. But from today’s view, it’s almost felt like a tug-of-war, when the technology is advanced by the service provider, it will drive business toward them and customers have more reliance on the service providers. But if the customers want to control their own destiny and implement those technology on their own, many of outsourced positions can be brought back to on-shore and skillsets elevated to a much higher level.

Trade-Off Decisions

After all, these trade-off decisions between people vs control, simplicity vs less flexibility, value creations to customers or to the service providers, and technology development capital vs reliance are critical dimensions that shared service decision makers and sales on the service side have to align with their core objectives.

Therefore having a set of clear and non-compromised priority of goals is essential to navigate through this complexity to ultimately achieve your shared service (customers) or sales (service provider)’s success.

Borrow More or Spend Less

I hope you noticed the debates related to #debtceilingcrisis going on :-), in essence, shall our government raise the #debtceiling , i.e borrow more, or shall the government agree to reduce its expenses or increase tax income (rate); or the government actually need to do both, therefore reducing expense at the same time raise debt ceiling….

After I read all the recent news headlines, I cannot help keep thinking what if it happens to a private company, what should the company do?

When interests hiking up, many companies rush to reduce their #leverage and pay off (a portion of) their debts, focusing on those high floating interest expenses that were the direct consequence from increased rate, in hope that the reduction of interest expense will help companies to improve their profit measure and therefore improve overall equity value.

Assets = Liability + Equity

First, if we just looking at the standard balance sheet, equity value should stay the same when debt is paid. The reasoning behind this is that equity value represents the value of assets related to equity shareholders owns. When debt is paid down, cash is reduced, and the reduction in debt liability should offset the decrease in cash under assets, resulting in an overall neutral effect on equity value. 

But of course, equity value can be affected by various factors much more beyond the direct impact of debt reduction, such as interest expense, profitability, and the overall financial position of the company as compared to its direct competition…

Operation Expenses #opex

When capital reduction involves repaying debt, it can lead to lower interest expenses and its debt service obligations. This can free up cash flow for other purposes, and improve company profitability performance.

However, capital in a company can be viewed as blood flowing through the human body. It keeps the function of all departments (organs) invigorated. Use a building as an example, capital for roof replacement can be cut or delayed for now, then it will result in lots of additional operation expense to keep patching it up for example. Same can happen in IT operation, automation equipment in stores or DC’s, so on and so forth, after all, cutting some of these capitals can actually result in operation expense increases, which may offset the “savings” that you have received from interests expense by lowering the debt level

Future Growth #capex

Cutting capital typically involves reducing the amount of available funds for investment. This can limit the company’s ability to pursue growth opportunities such as expanding operations, developing new products or entering new markets, especially if these funds were used to pay off debt, which can be equally seen as the return of investment in the business may produce less than the high interest rate debt. When it is perceived negatively by investors and shareholders, the result will be a decline in equity value, and directly impacting the company’s ability to attract future investment.

However, on the flipside, capital reduction can improve a company’s financial flexibility. This can provide a cushion during economic downturns or unforeseen challenges, enabling the company to better weather difficult times. Improved financial stability can indirectly support future growth by ensuring the company’s survival and enhancing its ability to seize opportunities when conditions improve.

Crisis vs Opportunity 

After all, capital reduction can be a great timing of a strategic restructuring plan aimed at improving operational efficiency, divesting non-core assets, or reducing debt burdens. By streamlining operations and refocusing resources, a company may be better positioned to allocate capital effectively and pursue targeted growth initiatives in the future.

And by the way, is our government looking at this crisis as an opportunity to improve its operation efficiency?

Ultimately, the impact of cutting capital on a company’s equity value depends on how effectively the company manages the capital reduction process and allocates the remaining resources. It is essential to consider the company’s overall financial health, strategic plans, market conditions, and the specific reasons driving the capital reduction decision. While cutting capital may temporarily limit growth opportunities, it can also create a foundation for long-term sustainability and provide opportunities for focused and strategic growth in the future.

Lead Procurement Through Turbulent Economy

Last recession in 2008/09 seemed caught everyone off guard, very few people predicted it, the stock market crashed on a Black Friday and subprime bursted and brought forward the ugly reality. In 2023, high inflation had plagued the economy for a while now, sure, we can all blame that onto Covid and its caused supply chain disruption, but as interest rates went up and most people have been crying wolf that recession is about to come, (it could be worse or maybe better than the last one), the recession seems not coming as of yet, and we might just end up with a nice “soft landing”…

Lessons Learned during the Recession (as a supply chain leader)

How to lead procurement through this unpredictable and volatile economy?

As known, indirect procurement refers to the established process and corp function of acquiring goods and services that are necessary for a business’s operation but do not directly generate revenue. In a volatile economy, the mission for indirect procurement leaders is to ensure that the business has effective access to the materials and services that it needs to keep its daily operations running smoothly at the most economic term.

Drive better collaboration between stakeholders and vendor partners

To lead indirect procurement team through a volatile economy, it is essential to focus on developing strategic sourcing plans for all indirect spend. This involves identifying savings opportunities in each spend area and building more meaningful collaborative supplier relationships. Use marketing expenditure as an example, procurement leaders should always understand the priorities from marketing leaders first (yes, they are your stakeholders, and you essentially work for them), when the marketing dollar goes up, speed is essence to lock in deals and deliver results whereas on the opposite direction if marketing dollar shrinks, procurement must partner with marketing to consolidate spend and negotiate to lower pricing by leveraging the consolidated volume.

Flex talent resources and increase procurement capacity

In addition to deeper level collaboration, procurement leaders should provide the flexibility to choose the talent strategy that will deliver the most value to the company. This could mean developing talents from your internal team, bringing in employees from other functions either within or external to procurement, or outsourcing to external service providers to augment procurement capacity.

Slides Share

https://www.slideshare.net/secret/bngxkXrDQejid6

Trade off between cost saving and pricing stability

Procurement leaders play a critical role in enhancing business operation resiliency by serving as orchestrators between a business and its suppliers. To lead an indirect procurement team through a volatile economy, procurement leader must take a broad set of actions across several workforce options and time horizons. In short term, procurement leaders should deem supply/services availability and pricing stability as higher priority as opposed to only focusing on achieving the “best deal”, i.e. the lowest costs.

Reduce lead time and increase velocity

Suggest procurement leaders put their hot deal negotiation aside (i know this is very hard) for now, and review your procurement process, identify those bottlenecks where can be streamlined. Simplify procurement process by reducing unnecessary approval and eliminating redundant steps. Leverage technology to improve communications and replace manual data entry with RPA (robotic process automation) and machine learning. Not only can it reduce errors, improve accuracy and very importantly increase satisfaction of your stakeholders, vendors and your procurement team members.

Therefore, leading an indirect procurement team through a volatile economy requires a focus on strategic sourcing, category management, workforce flexibility, and short and mid-term stability and resilience. By taking these steps, procurement leaders can ensure that their business has access to the materials and services that it needs to keep operations running in the most effective way.

Goodbye, Petco

Today is my last day with Petco after 4.5 years, so it sets another milestone of my career. It closed a window, hope it opens another door.

I still remember the first day in 2018 when I came to Petco and received warm welcome from procurement and shared service team. Time flies by so fast…

In the next 2 years, I launched and led the Cost Transformation Office, not just looking at every corner of non-merchandise spend, achieving 20-30 million of savings and driving continuous improvement year over year, but more importantly, we completely transformed the procurement team, instead of waiting for business team ticketing in our workflow, procurement team goes out and put forward category strategy and becomes a true business partner and advisor and locks steps with the business to drive “cost savings and productivity” together. 

Then of course, we all got hit by Covid. Those are the time that shelter-in-place affected all retail businesses, no exception to Petco. However just during those darkest time, procurement team turned on the full cylinder and requested our vendors to help and support especially when their services rendered are not being fully utilized or disrupted. This is the year, procurement team faced the toughest costs challenges and longest work hours (I organized and led daily stand up for 4 months straight while Petco offices are closed); and in the end, this is also the year that procurement team able to achieve the highest savings among all companies that I’ve worked with over the past 20 years!

Yes, in 2020 alone, 35million dollar savings within a year! And just because of Covid, people work from home, moving to suburbs and living in bigger space and adopting pets. Pet business took off and digital/e-commerce rose and these savings contributions and strategic partnership with some vendor partners that procurement was able to put in place all help to trajectory the business to the unprecedented level. In Jan 2021, petco successfully went public again.

We did not stop, in 2021 we launched project “Pluto” (yes, all key projects in Petco have a code name after pets) and right after that, late 2021 and beginning of 2022, I chaired and launched project Soaring Eagle. (Because of its sensitive nature, I won’t be able to share too much details and the project name.) All I can say is, this particular initiative will ultimately have a structural transformation of Petco overall G&A expense and make the company more lean and agile, it will become biggest enabler to get Petco to the next success.

Over the last 4.5 years, the most fun and exciting experience that I had at Petco is the project Soaring Eagle, because It made me feel very entrepreneurial and I was able to start from very scratch, find the right people, right location, register our entity, start bank accounts and payrolls, literally dropping a pin for Petco from the US to a location thousand miles away that I have never visited before.

 

As of today, project Soaring Eagle, same as Petco is now on its spring board, I cannot wait to see our team’s flawless execution of strategy laid out in front of them. The economy is about to entering into a volatile period, the company who can most stay lean and focused and stay on the path to consistently deliver values to customers will best weather the storm.

Healthier Pet, Happier People, Better World!

Bye Petco. Wish you the best!  

Farewell, Crotonville

GE Crotonville facility got shut down as a part of 3 way split and transformation of GE, that is where lots of GE leaders spent weeks of their time immersing themselves into GE leadership training, just like myself. Every part of those trainings is still freshly vivid to me, in spite that most of them are close to 15 to 20 years ago.

Obviously this is a part of cost saving measure, while GE no longer needs a size of facility like this because the company is downsized to 3 branches. However I would say closing Crotonville is also a potential opportunity to rethink of the leadership curriculum and also the values promoted from there and how will that ties into the new work force in the new work environment that we all live in.

At the peak of Crotonville era, there this “we are General Electric”, the most admirable company in the world, not just the pride, it is this culture about doing things “at any costs” and aggressive management style. Where I remember in some cases, the leaders swears and throws keyboard to the conference screens as long as getting things done are the hero’s; whereas the leaders were kind and patient were treated as weak and not given enough of stress or stretch.

When I was working in GE, it always feel like everyone is together in a pact, and if you are not able to withhold the hurricane coming at you, the person behind you will be able to stand up.

Now two decades have passed, are those values still holding true?

After Covid pandemic spreading, there are millions of Americans working from home; companies today drive the economic performance but no longer celebrating the mantra about “at any costs”. There are more and more emphasis about work life balance and especially among younger generation workforce, more and more people are willing to take a lower pay but stay flexible and working from home.

So facing the new work environment and new work force, leadership is changing, more is now demanded from the single lens of “all about making numbers”.  So is it fair to say, it is about time to let it go, it is a farewell not just to the facility, it is a good bye to the curriculum and culture, it is time to move onto the new century and new definition of leadership and performance management in workplace, i.e. Inspiring new generation of talents to get up in the morning, likely working remote and interacting with each other via video conferences and bringing their potential into full play

Contract Manufacturing Models and Near Shoring

Every time when there is a hiccup in the global supply chain, there will be voices in the US pushing from offshoring to near shoring. If you have read my blog “Made in USA”, which was written in 2013, it is almost about 10 years ago now. I remember that crisis was resolved and the tide died down, I would say the voice went away for a long while, and actually to the opposite, there was continuous emphasis on manufacturing at lower cost country from almost all industries, more to that, in the past decade, I’ve also involved many business process outsourcing work to push internal business processing to a 3rd party provider at lower country countries.

But in 2023, this time it seems the voice has never been stronger, either it was post -covid era after living through the painful supply chain disruption caused by the pandemic, or it is now national security concern or geopolitical conflicts where Russian invaded Ukraine and China challenges the exiting world order or what not, near shoring or even on shoring now became a hot topic again.

In this article, I want to provide you an overview of several business models of setting up and managing contract manufacturing at near shore, after negotiated and managed various contract manufacturing models for nearly a decade.

What are the factors to make you chose one models vs the others:

• Speed to market
• Flexibility and scalability
• Infrastructure readiness
• Talent or labor force availability
• Costs
• IP ownership and protection
• Geopolitics (incentive and political environment)
• etc

These contract manufacturing models are very well known, the reason I put them up here is to highlight some inherited attributes because we chose a model vs others and where to max the benefits and where to avoid some disadvantages

There is no right or wrong answers, each model has its own merits and shortcomings. At high levels, these are the 3 types of near shore manufacturing models:

• Contract manufacturing
• Managed captive (shell manufacturing)
• Captive (your own manufacturing)

A special insight under shell manufacturing models is over time I observed it evolved to many various arrangements, it essentially became a trade-off decision between risk (control) and reward (costs).

Hope this quick summary provides you some background information and help you make critical decisions along the way in your near shore journey.

How Procurement Leaders Cope with Inflation

The responsibilities of procurement have been continuously evolving in recent years, at the year of 2022, much more exceeded the traditional procurement activities, such as sourcing goods and services to allow business to operate in a profitable way.

Recent disruption of services and supplies across globe, regardless caused by Covid or what not, or worldwide inflations when global governments pump in cash to stimulate economy and therefore swamp of hot cash is chasing limited supplies, it all push procurement to the front and center of value chain that require all procurement professionals able to adapt and realign their priorities.  

Inflation and traditional procurement techniques = First Defense

What I called traditional procurement techniques is by using levers such as competitive bidding, consolidation of suppliers and incumbent negotiations, and benchmarking etc. All of those tools can still be deployed to defend inflations but because inflation is affecting overall market, where procurement team has to prioritize to focus on the areas where the pricing is less of direct factor of commodity, nor where the suppliers or service providers can monopolize pricing and terms as the dominating force in the market.

Inflation and scope change = Look Internally vs Externally

So when inflation happens, how hard is it gonna be to ask a vendor to decrease the price on exact same item or services that you purchase year over year, if the answer is no way,  so what do we do in Procurement?

One thing you can do is to review spend internally and reduce or eliminate discretional spend, this is where procurement leader can help business leaders to prioritize their spend and spend where absolutely necessary.

And if you are in direct product procurement, you can work with product design and development team to design for value, and design to manufacturing, where procurement can absorb inflation and passing a value proposition to the customers by leveraging and flexing the product design and material purchases.

Inflation and terms = What Else

Typical counter measure of inflation from central bank or government is to raise interest rate. When the interest rate giddy up, it means money worth more to the supplier and also more to the business and their customers. So in front of inevitable increases, I always asked my procurement teams to think about what they can drag down and pull off when we are to be knocked down in the boxing match like negotiations, i.e. when they negotiate price increases, can you push vendor to increase your terms or to delay payment.

Inflation and procurement savings target = Procurement Value

Procurement always take pride in a saving metrics, which typically involves rate and volume. If the volume is held constant, and procurement negotiated the rate down, obviously it will create savings year over year. However, in the inflation economic situation, business is cut back on volume and vendor raise their rate, therefore the saving metrics become a big challenge.

To demonstrate procurement value creation, in my opinion procurement needs to track:

• Cost avoidance (e.g. vendor requests to increase price by 20%, procurement negotiate it down to 10%, net result is 10% increase, however there is 10% avoidance)
• Demand control savings (e.g. advocate business to cut 50% volume or reduce discretional spend)

All in all, during inflation period, procurement must obtain CFO and finance support to value the work and capability of procurement function and this trust and support will carry procurement a LONG way and eventually creating a competitive advantage for the business and also risk mitigation of the tumultuous economy. 

Querétaro, Mexico

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Cost Savings Vs Cost Reduction

Lots of people will confuse about the concept of cost savings versus cost reduction, so every time when procurement leaders talk about cost savings, they are concerned about service quality will suffer.

In case of cost reduction, the primary objective is to cut back on expenses by reducing the scope or the frequency of the services without considering if it may have a negative impact on the end result. For instance, a retail store focused on cost reduction may review their facilities’ monthly floor cleaning service and reduce the frequency to a quarterly schedule during months outside their busy season.

Cost savings actually takes very different approach. Cost saving projects should find a way to receive cost reduction without any negative impacts on the service quality or on the final objective, therefore it turns into a Cost Saving project. In the above example, rather than cutting those monthly services, a retail store focused on cost savings would negotiate with the service provider to compress the service costs while still fulfilling the same objective. For example, one way to do this is by leveraging a service provider network in conjunction with a total cost approach to achieve the overall facilities maintenance objectives.