How Boeing, Toyota, Caterpillar, and other OEMs can double their current net profit by using smart contracts to become unmanned “virtual companies”, with or without cryptocurrency: Part 14
Super-charged commodity managers and the importance of going “beyond cost reduction”
In part 2, I discussed how smart contracts would liberate human employees to pursue higher value-add activities. Nowhere is this truer than in the role of commodity manager.
Let me describe the present-day. Imagine you’re a commodity manager at a prestigious Fortune 500. You’ve done all the trainings; Six Sigma, supplier negotiations, etc. You’re armed with all the tools to make a big impact.
But guess what? You’re bogged down in many administrative tasks and operations tasks. Not to mention the eternal struggle of cost reduction. After all, recall that Boston Consulting Group estimates that the average OEM needs to achieve 3% cost reduction each year in order to stay competitive.
John Deere has CROP (Cost Reduction Opportunities Process) for its suppliers, which encourages 3% each year. Airbus has SCOPe+ for 10% cuts by 2019. Boeing has PFS (Partnering for Success), which demanded 15% in round 1 and another 10% in round 2. So on and forth.
You don’t have time to do clean sheets (https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/aerospace%20and%20defense/pdfs/excellence_in_cost_management.ashx). You don’t have time to go the extra mile in preparing for negotiations. All in all, you don’t ever have time to fully apply what you learned.
The night before a supplier visit, you’re working on your laptop instead of re-reading “Read a Plant-Fast” by Eugene Goodson. Something about on-time delivery metrics, PPM scores, and PPAP deadlines is keeping you up.
You might even have to put up with accounting, invoicing, or contract enforcement here and there. While you do have a dedicated accounting department, things inevitably sometimes spill over. Bottom line, you never have time to truly reach the next level in supplier collaboration:
Crafting partnerships based on long term strategic interests and trends in emerging technologies.
In a world increasingly driven by tech and innovation, not reaching that next level with your supplier partners can be very dangerous.
Smart contracts are the lifeline to this major problem. They can take over the cost reductions (recall part 6), PPAP timelines, risk management, quality management (recall how the 3D scanners will report PPM data to the smart contract from part 3), on-time delivery metrics (recall VeChain Thor from part 3), etc.
Freeing up the human commodity managers to do what really matters all day, every day:
Use their impressive training and critical thinking skills to craft and negotiate partnerships based on long term strategic interests and trends in emerging technologies.
Having good working relationships with suppliers matters. It’s not just for the warm fuzzies. There is a big financial impact. In 2015, the Planning Perspectives group in Birmingham, Michigan proved that an OEM’s Working Relationship Index (WRI) had a massive effect on operating profit:
“Last year we unveiled an economic model that proves a direct cause-effect relationship between an automotive OEM’s supplier relations and the OEM’s operating profit. For the first time ever, it allowed us to put a dollar value on suppliers’ non-price benefits.”-John Henke Jr.
In other words, disgruntled suppliers might be intentionally less helpful or even take their innovations to more preferred customers.
Nissan, Ford, Fiat-Chrysler, and GM could have collectively had $2.02 billion more in operating revenue (in 2014) had their supplier relationships improved as much as Toyota and Honda’s did (WRI +8.7%).
Fast forward to 2018, things have not really changed all that much. Ford lost an estimated $600 million from soured relations and GM lost an estimated 400 million.
Sources:
Continue to part 15….