August 29, 2014

Q&A: CPO Insight w/ W. Lamar Chesney (pt 1)

“I never learn anything talking. I only learn things when I ask questions.” – Lou Holtz

While in London recently, I ran into an old colleague and, in many ways, a mentor. Many years ago, I met W. Lamar Chesney after he spoke at an event (which, by the way, brought the room to their feet). He and I have had many opportunities to discuss corporate finance and procurement trends and needs – and I have always valued his insight. Upon running into Lamar, I thought it would be a great opportunity to pose a handful of questions to him, for the benefit of our readers.

As a primer on his background and experience:

Lamar ChesneChesney Photo 2014y is a respected leader in procurement and business transformations. He is a seasoned financial, supply chain, strategy and operations professional with over four decades of diversified business experience as a senior executive in the consumer products, financial services, manufacturing, audit services, educational, healthcare, transportation, pofessional services and energy industries. His expertise encompasses numerous functional and diverse business leadership aspects, including (i) strategic sourcing and procurement; (ii) supplier relationship management; (iii) supply chain organizational design and change management; (iv) strategic and operations planning; (v) mergers, acquisitions and corporate restructurings; and (vi) governance and regulatory oversight. He has been a senior financial or procurement leader at numerous public and private, small and large, regional and global corporations, including senior executive positions with well-known entities such as Delta Air Lines, Coca-Cola Enterprises, The Coca-Cola Company, Marsh & McLennan Companies and SunTrust Banks.

 

Doug Markle: As the prior CPO at SunTrust and Delta, as well as your deep experience as CFO, what were the main business pressures that kept you up at night related to supplier management?

Lamar Chesney: The short answer to what I believe is an important question facing all CFOs and CPOs regarding supplier management is … assurances of delivery against expectations. CFOs and CPOs think a lot alike. They rely upon proven processes to provide reasonable assurance of expected outcomes; they value risk mitigation; they appreciate post-contract management; to name a few. So it is not surprising that apart from planning the right thing, designing the right thing, and contracting the right thing, that they both passionately desire to ensure delivery of the right thing.

The business of commerce is complex. Forces that inhibit progress and momentum are ever-present. Many of these forces we readily acknowledge. But there are always those unforeseen or ignored forces that creep into the delivery cycle that can slow or paralyze pace or progress. We look for certainly but need agility. We desire rigorous adherence in project management but need flexibility to respond to changing circumstances. CPOs (as well as CFOs) know that procurement’s role in the value chain is focused on cost, quality, service and continuity (hence, the term “supply chain”). In managing these unforeseen or ignored forces, we as professionals need to hone and hopefully master systemic thinking. I define this as the ability to readily recognize, assimilate, weigh and correlate elements that can impact (favorably or unfavorably) an undertaking. Many individuals who read context well are seasoned in this skill, as reading context is the precursor to effective systemic thinking.

Each of our businesses is dynamic in nature, diverse in operations and complex in scope and scale. The shifting sands emanating from the changing desires of our customers and the stress on the capabilities of our critical supply base creates an environment that requires us to actively manage our chain of supply. This is why I firmly believe that CPOs of today must not just understand the business and the market; he/she must anticipate the business and the market. This is the greatest contribution from today’s CPOs.

Someone recently asked me how I would summary what makes a great CPO. After a bit of reflections, I said he/she would be someone who can readily bring outside insights inside and bring inside insights outside. We are in a unique position to see both worlds. We cannot afford to not actively see the unforeseen or ignored forces. Because in our profession, ignorance is not bliss.

Doug Markle: Not all suppliers carry the same weight.  Since supplier management tends to follow the Pareto Principle (i.e. where 80% of spend tends to focus on the top 20% of suppliers), how did you manage preferred suppliers which carry more risk differently than the rest?

Lamar Chesney: While I agree that the Pareto Principle applies in most spend management situations, the determination of one’s critical suppliers will likely encompass more than the amount of annual spend to such supplier. There are additional elements to weigh in determining the criticality of one’s supply base. They include items such as financial fragility of the supplier, the number of segments/functions to which the supplier provides products and services, the uniqueness of product or service provided, the extent of alternative viable suppliers and the size of the company’s business relative to the supplier’s revenue base, to name a few. I only highlight this point to convey the importance (and discipline one should take) of assessing the overall business criticality of its suppliers.

I start with this because I believe you would (and should) tolerate a higher degree of risk with certain critical suppliers than non-critical ones. I realize it seems counter-intuitive but I would like to elaborate further now that I have your attention.

I readily agree that the higher the risk the greater the necessity of risk mitigation. After all, risk is not only a function of the probability of loss but the severity of loss when it occurs. And the severity of loss by a critical supplier will (by definition) be greater than one from a non-critical provider.   In instances where defined critical suppliers exist, you will definitely need to have a must more rigorous, frequent interaction with procurement, the business/function and the supplier. Continuous interaction between the business supplier managers and the supplier’s operations manager is essential (to spot, analyze and correct emerging problems); periodic (e.g., quarterly) “relationship” reviews facilitated by procurement (SRM) and business and the critical supplier are vital to identifying patterns and trends that if left unresolved could erode the harmonious working relationship; and Principle of Partnership agreed upon by both business and the critical supplier are necessary to ensure behavior, openness and mutual appreciation for both parties contribution to the relationship are present. This is how there is an elevated risk management and oversight employed with those critical suppliers. That being said, this is (in my opinion) more about performance, operational and (yes) risk management. I do agree this elevated management is necessary.

But my previous suggestion that one would (and should) tolerate a higher degree of risk with certain critical suppliers than non-critical ones still needs some explaining. I would surmise most would agree that within their critical suppliers there resides a very few “strategic” suppliers. The expectations from these strategic suppliers are greater and transcends more than “governing and managing risk”. In my opinion, this is where one must move beyond governance in the traditional sense to one of mutual enhancement of the business relationship … to innovation and first-mover’s advantage … to sustainable value creation. When one enters this mutual relationship with strategically aligned businesses, tolerance of risk takes on a different perspective. For innovation and first-mover’s competitive advantage will naturally elevate risk (prudent risk-taking I might add). So my point is that it is definitely important to manage risk differently with all critical suppliers while at the same time for those few critical suppliers that are real strategic partners to the company, risk must be viewed as a necessary pairing to creativity and competiveness.

For me, one shoe does not fit all … and there are many more pairs of shoes than just two.

 

This is part 1 of a 2 part session. Please visit us next week for further insight from W. Lamar Chesney.

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by Costas Xyloyiannis

Chairman & CEO

With HICX since its formation in 2004, Konstantinos has been instrumental in building it into a leading Supply Base Management company. He is responsible for setting the company’s strategic direction as well as overseeing the growth and expansion, strategy, planning, execution and overall performance of the company.
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