Today, we're joined by Brian Shanahan, the founder of Informita a consultancy that assists companies in the areas of working capital and procurement, focusing on analytics, implementation, and advisory. To date, he's worked with over 100 clients in 38 countries and across four continents.
Brian also collaborates with Layne Burkett to produce The Working Capitalists podcast, which addresses various issues around working capital, procurement, and supply chain and he joins us now.
Brian, welcome to the podcast.
It's nice to speak to you again. You said something in our prep sessions and it's been with me ever since. So, Brian, is it purchasing, or is it procurement?
I sat in the meeting, Greg, pretty early on in my career and that was the subject of the meeting with all my colleagues, at the time. And I'll be honest with you, I don't care. It's just a piece of terminology, but lots of other people really do and the interesting thing is if we talk about what did the two words mean, to purchase something means to buy something, get something, however you want to express that. To procure something literally means to get something. So for me, the words fairly interchangeable.
You'll find nowadays that probably procurement is the more fashionable word. There used to be this idea that somehow procurement was something terribly strategic, the purchasing wasn't, and to be fair, within the general profession, there are people who do things that are more strategic and deals and RFPs and stuff like that versus those people who are doing the more administrative jobs of processing purchase orders and requisitions and things like that. So there is a difference in what people actually do day-to-day, but as far as the words are concerned, I've never really understood why we needed two words rather than one.
Very good. And so let's go back in time a bit and let me ask what led you to this career in back-office functions like working capital and procurement or purchasing and in helping companies to manage these parts of their business?
Originally I trained as an accountant and I was very lucky to escape that because nothing wrong with being an accountant, but shall we say, it wasn't for me. I was lucky enough to sidetrack into consultancy, which was originally around accounts payable and procurement.
I had a lot of fun looking at everything from industrial cleaning to forklifts, to all sorts of fairly banal subjects. But it was a great grounding in terms of the basics of what you're looking for in the area of procurement, which is not just about price. It's about service, it's about quality.
procurement...is not just about price. It's about service, it's about quality.
There's a whole range of different things. For instance, if you're in aerospace there is all sorts of safety standards, which you wouldn't have if you were buying bricks. So, you have that massive variation across many different industries and the kind of things that you buy.
I've worked for all sorts of different companies and many different diverse sectors, which has been a fantastic education, and, as a result of that, I've accumulated a lot of experience, which is continuing to prove useful to my clients.
Let's geek out on procurement for a few minutes, because I think it's one of these areas of business where there's a lot of value, but there's not a lot of understanding. And so this is a great opportunity to tap your brain, to educate our community about just how important it can be to the success of a business.
How is procurement success measured, in your opinion?
That's a multifaceted answer because the basics in procurement is around, costs but unfortunately cost is just one element.
So you can get everything at the best cost, but if the quality of the service or our product isn't good enough, then you've wasted your money. So, there's a definite balance between how much you're prepared to spend and what you're prepared to get for that.
I'll give you an example.
One contract, in Northwest England, where the service measure on it was that they had to show up for emergency calls within three hours. It turned out that their nearest branch was three and a half hours away, so there was absolutely no way that could ever fulfill the contract, although it was very cheap, but you can see there is a contract that just didn't work.
Now, in the same place, one of their issues, where they were buying spanners and this was in a highly radioactive environment and metals, soften quite quickly in highly radioactive environments.
So, if you buy spanners and buy expensive ones, which you can - lovely chrome coated things - you can spend a lot of money for something that's only going to last for maybe 30 or 60 minutes, and then you throw it away. So, why not buy a cheap one, which is going to last exactly the same time and do exactly the same job? So, it's important to make sure that the specification of what you're buying is fit for purpose, but not over-specified because then you just simply end up paying more, for no real good reason. But again, it's the balance between, the cost of what you're buying, and the quality that you require for what you want to do.
Then, how do you measure that in different industries? Different industries will be sensitive to different things.
So, for instance, if I'm in an industry that's extremely cost-sensitive then the cost parameter is going to vastly outweigh everything else. That's usually defined by businesses that have quite low margins. You see that in a lot of industrial sectors, and that's also the case tradition of how many procurement people are trained. The idea that they just go in and slash-costs/slash-costs, that's something that they know pretty well.
industries like pharmaceuticals, healthcare...where safety standards are of absolute importance...have a tendency to spend too much because they need to mitigate, on the side of safety at all times.
If you go on the other side there's certain industries like pharmaceuticals, healthcare, things like that, where safety standards are of absolute importance. They tend to go the other way and oftentimes have a tendency to spend too much because they need to mitigate, on the side of safety at all times. So, you do get these kinds of different balances in different industries.
So, to say that there's one right way of doing this is not really the right answer. There's many different ways of doing this.
When you go back to industrial companies, if you work properly with your suppliers, especially around products, you may be forced down the cost reduction route. But you can actually do cost reduction and improve the quality of the product all of the same time by working with your supplier to help them to change their manufacturing methods so that they can make the product a better quality, more cheaply and then hopefully share the benefits of that cost with you.
Yeah, that's very interesting and it makes a lot of sense.
I want to switch gears slightly and if we think back to January of this year, the issue of supply chain was really understood by a very small percentage of people. But despite the fact that we hear about it every day now, in terms of PPE or ventilators or household paper products, supply chain is still a great unknown issue.
You talked earlier about balance. And my question relates to this. Who, in your opinion, is responsible for a healthy supply chain balance? Is it the manufacturer and supplier or distributor or three PL or is it all of them in concert with one another?
I would probably, go with a more holistic view on this. Ultimately consumers want things.
You mentioned PPE, but try and buy a headset in late 2020; you can't get one for love nor money at the moment because everyone's now working from home and they all have headsets and the way that they didn't have at this time last year or need.
2020 has it been a massive supply chain lesson for a lot of companies.
What have we seen over the last 20-30 years? We've seen everything go to a single source, largely offshored sourcing model - China was obviously very big in that. What we've seen a lack of is any kind of risk mitigation in that supply chain. This is not just about say PPE where, for instance, in the United States, they found out that there was actually only one time the company left in Texas, I believe who was making any PPE at all, in the entire United States. Now that was not the case 30 years ago but this is the consequence of that global sourcing, offshore and single-source just in time kind of stuff.
So we don't have buffer stocks. We don't have, all these things, which have definitely created efficiencies and reduced the price of goods that then end up in the consumer's hands. That's the good news. But we haven't mitigated for the risk of what happens when something goes wrong.
And actually, this has happened before. If we talk about the tsunami that happened in Japan, years ago, One of the consequences, was that in that region of Northern Japan, there's a lot of companies who make car parts, particularly for U.S. car factories. For weeks afterward, there was a big shortage of parts in the U.S., where there was demand for the vehicles but they couldn't make them fast enough because it didn't have the parts to finish the cars. We saw the same thing with fuel supplies with Superstorm Sandy. So, we know that these kinds of supply chain disruptions can happen.
The only difference with COVID is that it's happened, not just a regional scale, somewhere on the planet; it's happened on a global scale. Back in February, we saw China shut down and disruption as a result because lots of things just weren't going through but of course that has then echoed all the way around the planet. We've had all sorts of shortages of different things, from different parts of the world.
What's interesting is that you see people saying, "oh, we should, multi-source in different locations." Now, there was a bit of this starting already because we all read papers about the trade war between the U.S.A. and China. So a lot of American companies were doing their best to try and move stuff out of China, into places like Thailand, Vietnam, so on. But of course, the deficiencies of those markets is, there are nothing like as big as what China is. So it's only, only the first ones in have been able to make those moves and mitigate their risk to some extent those places. But for the vast majority of companies, they're actually still holding this risk right now today because they haven't had a chance to make these changes.
anyone who's involved in supply chain planning, particularly where we're talking about global sourcing, changing suppliers or changing locations, changing shipping methods, and so on... this is all difficult stuff to do because what you actually want is a simple long-term, reliable supply chain.
And why is that? Because anyone who's involved in supply chain planning, particularly where we're talking about global sourcing, changing suppliers or changing locations, changing shipping methods, and so on... this is all difficult stuff to do because what you actually want is a simple long-term, reliable supply chain.
But again, we haven't mitigated for the risk of things going wrong and of course, 2020 has been a real biggie on a particular subject.
No, I appreciate you giving that perspective from the last couple of decades and even up to current day. But let's assume for a moment that we're in a post-COVID-19 era and you're the head of procurement at a multinational company.
What strategies or tools are you looking to employ to protect your business from future disruptions?
If I talk to a category manager and I'll ask them, what is your strategy for this supplier or this group of suppliers? And it does happen fairly often that someone says, "oh, these guys are some kind of a monopoly player or an oligopoly player; there's very little I can do about this. I just have to accept what they give me."
For me, that's a failure in strategy.
To give you an example, many years ago, I was involved in a project where we were buying a polypropylene. And at the time, this stuff was being made in one single factory in Europe, the particular standard we were looking for, which meant that these guys would pretty much charge what they liked and they rationed the product because of course there's plenty of demand.
I was being told, there's not a whole lot we can do about this and I said, yes, we can. So, we sent a team off to Eastern China, where everyone said, the quality is not good enough, et cetera. We built a plan with a company over there to "up-standard" them to the quality that was required. Then, we turned around to the original supplier and to said, listen, you've got a choice here, you say either I'm going to give all this business to this Chinese supplier, in two years time, when they're up to speed, or you can start playing with me fairly right now. How do you want to do it?
That's just a case of using procurement techniques to make sure that you've always got the strategy for how you're dealing with the supplier. Not necessarily in an aggressive way but in a way that you're not getting beaten over the head the whole time.
Now, if you take the technology aspect into this, and going back to what I was saying about supply chain risk, one of the things that we've learned in 2020 is that the holy grail is not necessarily shifting everything to low-cost countries. There is a risk around that. One of the consequences of that will be that we're going to see increased levels of industrial automation in the coming years. Now the technology is already there but for years and years, it was just too expensive compared with these cheap labor pools in places like Southeast Asia and China. That's now changing - it was changing anyway because labor rates and all those places are going up and up, all the time.
So this is going to accelerate the change where we're going to go to "labor-less manufacturing." What that will also mean is we don't need to go to those low-cost countries for that supply. So we could end up with smaller local factories, where they don't need the same kind of old fashioned economy of scale because we have everything automated.
The second part, in terms of technology, is really, how we're all using technology in terms of data. One thing that is very common in modern procurement, for the less experienced people, is that very often they're buying things that they've never seen or they've never seen how they're used. Therefore, it's very difficult for them to understand, what the application of these things are and so on. In the procurement world, you need to get out and see how the product or service is actually being used by the end customer, or if you don't really understand that the definition of what you're supposed to be doing.
the largest companies in the world - they have fantastic ERP systems and they've built BI - business intelligence stuff and there's loads and loads and loads of data but there's not actually many people making a whole hell of a lot of sense of it and that's a problem.
But going back to the technology piece now, most of us are completely bombarded with data. We can go to the largest companies in the world - they have fantastic ERP systems and they've built BI - business intelligence stuff and there's loads and loads and loads of data but there's not actually many people making a whole hell of a lot of sense of it and that's a problem. Now you see many FinTechs are trying to get into this kind of area where they can start making sense.
And we talk about things like artificial intelligence to understand patterns and so on. So this is going to be, a more accelerated move, because, if you're dealing with things globally where you are naturally remote from things, then, it's more important to have quality information because otherwise you're lost.
That concludes part one in our conversation with procurement expert, Brian Shanahan, check back soon for part two.