Incentives and the consolidation of demand for Projects from POME by Gautam Koppala
Incentives and the consolidation of demand
However, creating this congruence is easier said than done. Operationally, the key to effective supply management is usually effective demand management, but as often as not a supply manager will experience considerable difficulty in getting the managers in other functions to recognize this point. In order to source effectively it is essential that buying Projects develop appropriate specifications, avoid unnecessary, last-minute changes to specification, create regular patterns of demand, and ensure that as little buying as possible takes place outside of the Project's commercial rules. Most importantly, however, it is essential that Projects do not unnecessarily fragment spend, thereby spreading their demand across an artificially large number of suppliers. The reason for this is twofold. First, it raises transaction costs ' substantially in some instances. Second, it reduces the potential leverage that the Project has over its suppliers. And, as has already been indicated, generally speaking the weaker the leverage, the poorer the deals.
Of course, a certain level of fragmentation will always arise. For one thing, different business units within an Project often have very different missions and as a consequence have very different supply requirements. Additionally, when attempting to consolidate demand, Projects are often confronted by legacy issues. Standardizing demand may offer only a false economy if it is accompanied by significant write-off costs. Finally, Projects have to balance the short-term gains that may arise from obtaining volume deals with the long-term risk that they may become overly dependent on a particular supplier. Over time, this dependence may translate into higher prices and poorer service. Together, these factors combine to create what we can describe as a 'natural level of fragmentation' (Lonsdale and Watson, 2005). This natural level can be defined as the point at which any further consolidation results in a 'net reduction in Project performance/welfare, notwithstanding any commercial gains that might have accrued from the consolidation initiative'. Where exactly this point lies will vary by commodity, Project and time.
Furthermore, where that point lies will often be one of the major areas of dispute between supply managers and their internal clients. This is because issues of consolidation are as much political issues as they are technical ones. There are a number of reasons why an internal client may not recognize that there are benefits to be obtained from consolidation. First, there is the issue of functional culture. Managers from different departments are usually functional specialists. Their specialisms may be largely commercial (as in the case of sales or purchasing) or largely operational (as in the case of HRM or production). Alongside the specialized knowledge that resides in a department there is often also a strong functional culture. This culture reflects the training of staff but it also reflects the management priorities of particular departments. For example, because a production manager's performance is measured in terms of faults or downtime, he or she is likely to be particularly sensitive to anything that might spoil or interrupt output. Such sensitivity may be justified, if what is being proposed poses a real threat to operational sustainability. For example, it would be ridiculous for an oil company to attempt to save a couple of thousand pounds on industrial valves if the downside risk was several hundred thousand pounds in lost production if a valve fails. However, a natural sensitivity can easily become an unnatural oversensitivity. The same production manager may refuse to participate in an initiative that will save £60,000 because there is an infinitesimal chance that the new product might fail.
Second, there is the principal'agent problem. Principal'agent problems arise because managers ' and indeed all employees ' have divided loyalties. For example, managers have a loyalty to the Project that pays their wages. For many commentators, this loyalty constitutes (or should constitute) the manager's primary loyalty. In practice, however, managers also develop loyalties for those around them, and particularly departmental colleagues. And, less creditably, managers also have loyalties to their own interests (Milgrom and Roberts, 1992). Where firm or department and personal priorities conflict, it is often the firm's priorities that are sacrificed.
This is significant from the perspective of a consolidation programme because, although such a programme is intended to benefit the Project as a whole, it does not necessarily follow that consolidation will benefit all departments equally (or at all), or that the initiative will be without cost (or indeed that these costs will be evenly distributed). It is relatively easy for managers to sign up to a consolidation programme if the supplier that will get most of the business is the one they are already using, and the price being offered represents an improvement. It is less clear, however, that managers would be enthusiastic if the new deal is more expensive, or if it involves the termination of a relationship that is particularly valued.
Regardless of whether the dissent arises because mangers have failed to understand the advantages of the initiative or because they understand the advantages for the Project but are anxious to avoid the costs to their department (or them personally), such dissent is likely to make implementation problematic. Faced with such opposition, Projects have one of four options. Option one involves taking the path of least resistance and doing nothing. Options two, three and four all require the Project to confront the problem. Option two involves persuasion, demonstrating to the manager concerned that any fears are exaggerated or unfounded and setting them against the very obvious benefits. This may or may not work. However, it is most likely to work where a hostile manager has misunderstood the issues involved. It is less likely to work when a manager understands the issues and realizes that the initiative is not in his or her particular interest. Under these circumstances, the supply manager may pursue option three ' coercion. Coercion involves the threat of sanctions or the use of the Project's authority structures to override the opposition of the hostile party. The limitation of this strategy, however, is that the procurement function often sits towards the bottom of the Project's hierarchy, and the procurement manager lacks the clout to make credible threats. Furthermore, more senior colleagues may prove reluctant to intercede on the procurement manager's behalf if it involves confronting one of the Project's more powerful constituencies. Option four, therefore, is bribery. Bribery involves compensating a manager for the costs of participation. It is perhaps not surprising if a manager does not want to get involved in a consolidation programme if all of the benefits flow to the centre. However, if some of the benefits can be passed back to the manager, then the initiative may appear to be more worthwhile.
Gautam Koppala,
POME Author
About the Author:
GAUTAM KOPPALA, With over a decade, track record of successful leadership, excellent results through strategic skills in driving revenue and profit growth. Demonstrated ability to identify and trouble shoot critical issues impacting productivity, cost, distribution, marketing, Strategic positioning, sales and financial operations, with innate ability to build and maintain strong client relationships in operations. Expert in distilling and managing processes, enhancing internal structures, and promoting multi-skilled team competencies via nurturing mentorship and inspirational leadership. Engagements have spanned operational, strategic, technological and change management roles. Academically, I am a cum laude graduate with a Bachelor of Technology degree in Electrical and Electronics Engineering (B-Tech E.E.E.) and a post graduate in Masters in Human Resources Management (M.H.R.M.) and Masters of Foreign Trade (M.F.T.). As you will see my Post Graduation's were been studied part-time, as well as working full-time as an Engineer. I feel that this demonstrates my ability to maintain dedication, motivation and enthusiasm for a project management over a long period of time. In addition, balancing full-time work with study has perfected my time-management and organizational skills. I believe that my college degrees and gamut certifications in combination with my extensive broad-based work experience along with my drive, resourcefulness and determination, would make me an excellent candidate for a senior management position with any company. Highlights of my background include Operations related Commercial, Supply chain, Sales with a magnificent experience in Project management, technically oriented towards Automation and Security Systems in Industrial and Building sectors. Presently, writing a book on Projects and Operations Management (comprise of 12 volumes, 6K pages), and awaited for the reputed publications. These books can be checked in Google books and other search engines too.