Sunday, August 5, 2012

Purchasing Social Responsibility

Examining Purchasing Social Responsibility  

The concept of purchasing social responsibility (PSR) is defined by Carter and Jennings as “the involvement of purchasing managers in the socially responsible management of the supply chain” (2002)  and as “purchasing activities that meet the discretionary responsibilities expected by society” (2004).  Discretionary activities are those based upon an organization’s judgment rather than upon legal requirements or ethical issues.  Carter and Jennings consider five discretionary undertakings of supply management--diversity, the environment, human rights, philanthropy, and safety--to be interrelated parts of a broader concept of purchasing social responsibility (PSR) rather than stand-alone areas of management and of research.

Purchasing managers should be concerned with PSR because of their unique position to leverage strategic roles to set company standards for socially responsible practices.  Purchasing’s organizational importance has changed from that of providing  the lowest-cost supply solution to that of coordinating  and integrating procurement processes, both internally and externally, to one of adding value to the supply chain.  Through interaction with other key functional areas of an organization, as well as externally with suppliers and customers, purchasing managers can positively impact social responsibility performance in the supply chain both upstream and downstream.  For example, contract language and conditions can require that suppliers (and second- and third-tier suppliers) observe environmentally sound practices, provide safe and humane working conditions, and permit periodic audits of their compliance in these areas.  On the other hand, irresponsible actions by supply managers and their suppliers in areas such as human rights and the environment can significantly damage a firm’s performance and reputation, which can lead to backlash from customers, stakeholders, regulatory agencies, activist groups, and the media.

Another PSR area of significance to purchasing organizations is the understanding by supply management of the interrelatedness of individual discretionary undertakings of social responsibility, such as diversity and philanthropy, within a broader framework of purchasing social responsibility.  With this understanding,  Carter and Jennings (2004) point out that supply managers can leverage the knowledge gained in implementing one area of PSR when determining how to implement and manage other PSR activities.  Specifically, the similarity of the drivers, barriers, and effective tactics used to overcome these barriers to implementation of an initiative such as minority business enterprise (MBE) sourcing may, in many cases, be applied to implementing and managing programs in other areas of PSR such as human rights issues in suppliers’ plants. 

To help supply managers fully understand the interrelationships among key social-responsibility elements, the ISM’s (Institute for Supply Management) Commission on Social Responsibility identified seven core principles and practices of PSR in 2002.  ISM (2008) believes that utilizing these guidelines will enable purchasing professionals to strengthen an organization’s culture, improve trust in internal and external relationships, anticipate challenges more readily, and reduce business risks, while adding significant long-term value to their organizations and to society. 

The best corporate social responsibility initiatives often come from within a company whose employees readily embrace new ideas and truly care about making changes for the better.  As reported by Carter and Jennings (2004), top management leadership by example, combined with shaping an organizational culture that embraces fairness and good corporate citizenship, has a direct and significant effect on purchasing social responsibility (PSR).  Supply management professionals are a key to helping organizations identify methods and opportunities to support future social responsibility initiatives.  They are uniquely positioned to take a leadership role within the organization and with suppliers.  With their wide range of contacts and sphere of influence throughout the supply chain, they can be pivotal in the success of “raising the bar” and removing barriers to developing and implementing new PSR programs.  By working across boundaries, purchasing managers can take the lead in highlighting what needs to be done in terms of social responsibility, now and in the future.

Innovative employee initiatives of front-line purchasing personnel who are aware of customer demands and trends—such as concerns for product safety, environmental impact, and product origin--are also important to shaping forward-looking PSR programs.  Carter and Jennings (2004) found that although individual values of supply management employees do not directly impact PSR programs, their values can play a key mediating role in initiatives instituted by employees.  The implication for purchasing managers is that employees selected to develop new PSR programs should be ones whose personal values and beliefs support PSR and align with the activity under consideration.  Additionally, successful employee initiatives concerning the enhancement of PSR activities are more likely to occur in a people-oriented environment that allows for missteps and risk-taking in order to capture opportunities and encourage innovation.
The Institute for Supply Management’s (ISM) seven core Principles of Social Responsibility (2008)  provide a framework for purchasing organizations to lead the way in developing proactive programs as new PSR issues arise or are foreseen.  These guidelines are organized by the following dimensions of social responsibility involving the purchasing function:  community, diversity, environment, ethics, financial responsibility, human rights, and safety.  They can be used by supply management to define and put into place, both internally and externally, ambitious and demanding goals for the future.  ISM recommendations for interacting with suppliers on social responsibility issues can be used to encourage collaboration, partnerships, and open communication lines for the sharing of product innovation, new technology, and the use of best practices in order to better position the supply chain to meet future PSR challenges.  For example, early supplier involvement in such areas as product design for reuse and disassembly, waste reduction, reduction of packaging material, and product life-cycle analysis can increase commitment and opportunities for firms to be environmentally responsible and to stay ahead of rising public expectations and demands for environmental friendliness. 

Other ways in which purchasing can influence an organization’s future social responsibility agenda is by having clear policies firmly in place concerning issues such as safety and human rights and by following through on their utilization.  To address diversity, purchasing can encourage or require the use of minority business enterprise procurement programs in certain areas of its own and its suppliers’ organizations.  It can refuse to do business with firms that are irresponsible in dealing with human rights issues such as paying workers a living wage and providing humane working conditions in factories.  Other important PSR considerations can be included in the supplier selection process and in procurement contracts.  Social responsibility audits can be conducted periodically to insure compliance although guidelines and standards need to be developed for consistency in evaluating findings.  Similarly, purchasing needs to develop performance metrics for most of the PSR dimensions in order to build a convincing business case for their implementation.  A purchasing organization that does more than “talk the talk” on socially responsible practices will be in a stronger position to influence its firm’s social responsibility agenda as it evolves in a complex and dynamic environment.      

Social responsibility has to be a companywide, cross-functional effort that is embedded in an organization’s culture and that extends outside the organization as well.  Although no one function or person can do it all, supply management is well suited to be the facilitator for developing, coordinating, and implementing a firm’s socially responsible initiatives and for guiding its future progress.

Copyright 2012.  James L. Alyea.  All Rights Reserved.

For more information, please contact Jimmy Alyea:

Works Cited

Carter, C. R.  (2006).  Purchasing social responsibility—what is it, and where should we be headed?   In J. L. Cavinatto, A. E. Flynn,  & R. G. Kauffman (Eds.)  The Supply Management Handbook, Seventh Edition (pp. 393-407).  New York:  McGraw-Hill.

Carter, C. R., & Jennings, M. M. (2000).   Purchasing’s contribution to the socially responsible
management of the supply chain.  Focus Study:  Center for Advanced Purchasing Studies.  Retrieved from

Carter, C. R., & Jennings, M. M. (2004).  The role of purchasing in corporate social
responsibility:  a structural equation analysis.  Journal of Business Logistics, 25.1. 
Retrieved from

ISM principles of sustainability and social responsibility. (2008).  Institute for Supply Management.  Retrieved from

Monday, July 30, 2012

Purchasing Outsourcing

“The Challenges and Opportunities associated with Purchasing Outsourcing”

Outsourcing of procurement activities is on the rise and is being broadly adopted across many industry segments (Morphy, 2012).  The current economic environment has increased interest in purchasing outsourcing as companies look for new ways to sustain profits through increasing operational efficiencies and make significant reductions in their cost structures.  While outsourcing of HR and F&A (finance and accounting) is a common practice, procurement outsourcing is becoming increasingly accepted as a more viable strategy for both cost and performance improvements.  A strategic approach recognizes that the primary benefit, however, is not in reducing costs of the procurement organization, but of creating value from corporate spend.  Since the early 2000s, leading organizations have changed their perspective of procurement organization from that of a cost center to a profit center, which has given a new dimension to procurement as  a “game changer.”

Traditionally, the  focus of procurement outsourcing has been on transactional purchasing activities that involve select portions of  indirect spend.  These include processing purchase requisitions and purchase orders, managing simple RFQs, and invoice matching and payment.  However, the increased availability of global skills in terms of process and technology has created the opportunity not only to standardize and automate procurement processes, but also to leverage improved performance and best-in-class services by moving value-added activities to a third party specialist.  With companies increasing their focus on core business processes to gain a competitive advantage, they are more open to outsourcing strategic procurement efforts such as contract management.  Areas within the procurement process can be categorized as core and non-core activities and selected ones identified as individual opportunity areas to be outsourced.  The supply base has developed significantly in recent years and features a number of major service providers like IBM Global Services and Accenture that are capable of supporting high-quality outsourced strategic procurement efforts.

With the wide range of service provider skills and offerings currently available, selecting the right procurement service provider (PSP) presents a major challenge.  There are many new entrants in this immature and confusing market, and in some cases such as category-specific specialists, offerings are still under development.  While a firm that engages a call-center vendor can feel secure about the services to be provided, the same cannot be said of the procurement manager who is considering outsourcing strategic sourcing or category management.  Exercising “buyer’s caution” is the strategy to be followed when evaluating the specifics of services offered and vendors’ competencies.  Vendors should be assessed in such areas as category expertise and use of best practices, technological tools and degree of automation utilized, size and appropriateness of supplier network, ability to analyze spending patterns and aggregate spend, level of supplier management provided, track record/references for handling processes of similar size and scope, and willingness to sign a carefully constructed Service Agreement (SLA), among other things.

Just as vendor solutions vary widely, so do contract methods, and the ultimate success or failure of an outsourcing agreement may very well lie in the contracting process.  A detailed contract should include SLAs that define responsibilities and service-level expectations, as well as  provide process-specific metrics and milestones,  a clear statement of the value-based pricing by which solution fees are determined, a dispute resolution process, and an exit strategy in the event of an unforeseen situation such as bankruptcy.  At the present time, there are no standardized contracts for the three categories of PSPs:  transaction-focused providers; category specialists; and comprehensive service providers, such as IBM and Accenture, which offer business process outsourcers and procurement specialists.  The many different types of procurement contracts and the variety of options for each provider classification represent a major challenge in the outsourcing decision and vendor-selection process.

Outsourcing a procurement operation or activity to a PSP presents other considerations for an organization, such as a need for transparency in pricing/costing.  Depending on the extent of outsourcing,  significant change management is often required.  Firms need to manage carefully the transition of business processes to PSPs to facilitate continuity and to ensure that internal employees do not feel threatened and are motivated to make the process work.  Supply management professionals worry about losing direct contact with suppliers and staying up-to-date on new procurement technology and current trends in the marketplace.  Data integration raises concerns about the use and ownership of proprietary information and technology.  In short, procurement is not as easily outsourced as other functions because procurement results tie directly into a firm’s cost of goods sold and profit and loss statement.

Purchased goods and services account for a little more than half of every dollar of revenue, and 80 percent of their cost is set by the end of the design and sourcing cycles (Morphy, 2012).  Thus, sourcing can provide  the single largest opportunity for an organization to reduce costs.  Procurement outsourcing is well suited to companies faced with increased global competitive pressures and rising demands to cut costs and improve shareholder value.  Industry research by the Boston-based Aberdeen Group reports that procurement outsourcing can provide dramatic improvements in procurement efficiency and effectiveness as follows:
  • an increase of 28% in average savings from sourcing
  • an increase of 18% in spend under management
  • an improvement of 31% in contract compliance
  • an increase of 32% in the percentage of suppliers enabled

In addition, operational costs can be reduced 15 to 20 percent through process improvement, staff right-sizing, labor arbitrage, and achieving economies of scale (qtd. from Huber & Minahan, 2011).  Aberdeen’s research into U.S. and European companies’ sourcing, procurement, and supply management practices indicates that even the largest firms do not have the skills, expertise, and infrastructure required to effectively manage procurement across all spending categories.  In general, because most companies do not handle procurement very well when left to their own devices, companies of any size—small, medium, or large—could utilize some level of procurement outsourcing to their benefit, particularly for indirect goods and services.           

Senior management must realize that viewing procurement outsourcing as a long-term endeavor and making substantial investments in sourcing policies will produce tangible results.  Adopters  need to assess carefully the comparative costs and risks of insourcing versus outsourcing specific procurement activities, manage potential risks, and put sufficient effort into process design and optimization.  It is critical for supply management professionals to understand that outsourcing the management of procurement activities does not release them from responsibility and that outsourcing procurement must be managed on a continuous basis.  Because the procurement outsourcing market is a “buyer’s market,” firms should  work with PSPs to devise the solution that best fits their business environment and strategic objectives. 

Copyright 2012.  James L. Alyea.  All Rights Reserved.

For more information, please contact Jimmy Alyea:

Works Cited

Aberdeen Group.  (2006).  You will outsource procurement:  here’s why and how.  mThink Knowledge.   Retrieved from  heres-why-and-how

Huber, B. & Minahan.T.  (2011).  Procurement outsourcing:  not an all or nothing value proposition.  TPI Information Services Group.  Retrieved from

Morphy, E. (2012, July 27). Latest trend in SCM:  outsourcing procurement.  E-Commerce Times. Retrieved from

Friday, July 27, 2012

Key Steps to Designing an Effective Supply Strategy

Identifying the key steps to designing an effective supply strategy

Developing a supply strategy is a process that when integrated with a firm’s other business processes, contributes to a firm’s overall goals of competitive advantage and profitability.  A simple, but effective purchasing portfolio model may be constructed using a supply segmentation technique that classifies products or services to be sourced in order to formulate distinctive supply strategies for each.  Although  the specific supply strategies, tactics, and supply management approaches developed will be balanced and  tailored to an individual firm’s needs, certain basic steps are common to their development.

The first step is to categorize the types products and/or services to be sourced.  Products are evaluated on the basis of the internal “risk” a company would encounter if the item were no longer available or of low quality, followed by an assessment of each item’s “value” (both monetary and intrinsic) to the company.  The value of a relatively low-cost item might be high when it adds significant value to the organization’s output.  This could be because it makes up a high proportion of the output (for example, raw fruit juice used by a fruit juice maker) or because it has a high impact on quality (for example, the cloth used by a high-end clothing manufacturer).  A detailed “spend analysis” that is aggregated across  divisions, strategic business units, and suppliers should also be developed for all sourced items.  This helps define key spend categories and assess impact on a firm’s profitability.

The next step is to graph each unit or group of units on a chart on the basis of two dimensions:  supply market complexity and the cost/value of each unit.  Each dimension has two possible values, “high” and “low.”  The horizontal (X) axis represents cost/value (measured as the total annual dollar amount spent on each) and the vertical (Y) axis represents market complexity.  Market complexity is determined, in part, by the number of suppliers, available capacity,  product specifications (unique or standard), and availability of substitutes.  An upscale specialty jeweler such as Tiffany’s would face a highly “complex” market with few suppliers, limited capacity, unique product specifications, and no available substitute products, whereas a mall-environment jewelry store would deal in a simple or low- complexity market with numerous suppliers and substitute products available. Market analysis helps a firm assess the current supply market structure and available purchasing options  and supply risks, as well as analyze trends and forecast future supply problems.

After completing the market analysis, the previously classified products/product groups can be segmented on a purchasing portfolio matrix consisting of four quadrants that represent distinctively different supply environments:

Quadrant I, “tactical” (low market complexity,  low cost/value);
Quadrant II, “leverage” (low market complexity,  high cost/value);
Quadrant III, “critical” (high market complexity, low cost/value); and
Quadrant IV, “strategic” (high market complexity, high cost/value).

 The items in each quadrant require development of specific supply management goals and strategies of varying complexity.  For example, the supply management focus on items in the strategic quadrant is on increasing competitive advantage through strong buyer-supplier relationships such as strategic alliances, joint ventures, and sole sourcing and through medium- to long-term supply contracts.  Mutual trust provides access to new technology that is important for developing value-ads that increase customer satisfaction and loyalty.  In contrast, the standardized, generic products in the high-volume leverage quadrant do not require long-term supply contracts or supplier partnering strategies because products and suppliers are interchangeable and supply risk is minimal.  With a goal of decreasing unit costs and increasing profit margins to contribute to corporate profitability, managers can utilize traditional supply strategies.  These include aggressively seeking lower-cost suppliers from a large supply base, finding substitute products,  and leveraging buying power to obtain volume discounts and competitive bids.

Distinctive differences may also be found in the supply market characteristics of the critical and tactical quadrants, with a corresponding adjustment of  supply management goals and supply strategies.   To illustrate, the supply risk of items in the low-value critical quadrant is high, so management’s goal is to minimize supply disruptions even if additional cost is required.  Strategies to assure supply may entail keeping extra stock and developing contingency plans to deal with  unexpected situations.  When possible, ways should be found to move critical items into the tactical quadrant to reduce their supply risk.  In the tactical quadrant, which consists of low-value, non-critical items, supply management’s emphasis is on reducing acquisition costs  that may consume up to 80 percent of a purchasing department’s time.  Strategies include utilizing integrated supplier relationships such as electronic data interchange and supplier-managed inventory systems to reduce transaction and logistics costs in this category.

Each stage of the supply segmentation technique is an important building block in the systematic process of constructing a purchasing portfolio analysis model based on the relationship between market complexity and cost/value.  The portfolio matrix forms a simple, but clearly focused framework for analyzing supply environments in order to develop feasible supply strategies for the sourcing of products in each quadrant.  This model presents a multi-stage process of developing supply strategies that minimize a firm’s supply risk and highlight opportunities to improve a firm’s overall buying position not only in the short term, but also in the long term.  As such, it encourages CEO’s to look at the “big picture,” and it changes the traditional operating perspective of “purchasing” to one of strategic supply management.

Copyright 2012.  James L. Alyea.  All Rights Reserved.

For more information, please contact Jimmy Alyea:

Thursday, June 28, 2012

Continuous Quality Improvement Strategy

Analysis of, “Continuous Quality Improvement as a Survival Strategy:
The Southern Pacific Experience”

When the Southern Pacific Railroad (SP) was purchased for $1 billion by businessman Philip Anschutz in 1988, the company was in a period of decline and struggling to survive.  For every dollar collected from shippers, it was costing SP $1.03 to haul their freight.  Southern Pacific had been without leadership for almost two decades and had been held in trust the preceding five years following a failed 1983 merger.  Anschutz found himself with a 150-year-old railroad with low morale, hostile customers, thin management, and not enough investment in plant and equipment and training.  In addition, the new company was not a single entity, but rather a collection of divisions and subsidiary railroads, each fiercely independent.  He knew he had to fix the company quickly, but also sensibly:  his solution, a total re-focus on customers and a Deming strategy of continuous quality improvement (CQI).

In 1989, Anschutz made top management changes by bringing in an expensive, but highly experienced team of all-stars who had held senior positions in companies with successful CQI programs.   Kent Sterett, a long-time proponent of Juran’s strategic-planning processes and a former judge for the Baldrige Award competition, brought a fresh perspective on quality.  He had set up Union Pacific’s pace-setting Quality Management System, and he did the same for SP in 1990 (Welty, 1992).  The new executive team made a series of benchmarking trips to such quality leaders as Xerox and Milliken where it was impressed by the first-line employees’ involvement in quality.  After a pilot program tested in SP’s Eastern region showed that quality could make a difference, Anschutz began implementing a three-phase quality improvement turnaround strategy in 1990.

Because of the company’s rapidly deteriorating situation, Anschutz was operating on a tighter time schedule than was traditionally thought to be wise for implementing CQI.  Using  Juran’s planning-based approach to improvements, a strategy was developed based on Malcolm Baldrige Award criteria to help top management lead the quality-improvement  process.  The CIO, COO, and the Vice Presidents became the Quality Council.   The design phase began with one-on-one leadership training for upper management.  Based on information gained from the previous benchmarking trips, management group sessions were used to identify techniques that would be most beneficial to SP and its unique needs and to determine key-performance indicators.  A mission statement was developed, objectives for 1991 were set, and a five-year strategy was designed. 

With an action plan and a framework in place, management began to introduce its quality improvement strategy to employees in November, 1990.  In a geographically dispersed company with multiple cultures operating in a turf-protecting mode, changing the behavior of the entire workforce was a monumental task.  Not only was the company operating with a workforce that was older in age than is typical in U.S. industry (some were third generation SP workers),  but it was one that was more than 90 percent unionized by 14 different craft unions.  If all employees had been confronted instantly with QI, anarchy would have probably resulted  from trying to tackle too much at once.

Instead, role modeling by top management and a series of 125 “town hall” meetings led by corporate officers, not first-line supervisors, were held to tell more than 13,000 workers about the quality-driven approach to doing business.  Executive work days were initiated during which corporate officers were out on the track and yards working side-by-side with employees.  Their presence demonstrated the importance of “team play” and helped dissolve distrust that existed between labor and management.  Fifty union leaders were brought to San Francisco and shown the dismal operating performance data, after which they were asked to participate in critiquing the new CSI strategy.  All but 2 of the 14 unions participated.  In addition, forums were set up with union representatives and employees to open communication lines and to identify the common grounds of quality for both groups.  Involving union leaders in management meetings was a first for the industry, but it worked! 

SP’s formal quality program began in May, 1991.  Almost immediately, a blind survey was sent to 600 customers to monitor customer satisfaction (Delsanter, 1992).  Because current customers were never certain if their shipments would arrive on time, initial findings showed customers wanted consistent, quick, on-time service, every day.   These survey results were used as a baseline from which subsequent surveys were analyzed for progress, and improving service reliability became the cornerstone of  SP’s quality efforts.  As SP’s chairman Philip Anschutz stated, the old way of doing business—“you need us more than we need you”—was out (Lustig, 1992).  He wanted to show customers that the new way—with buzzwords such as “quality” and “customer driven”—was in.  To communicate its commitment to customers, management created “the New SP” train that began a 45-day, 20-city, 11-state tour in March, 1992.  At the train’s last stop, SP President Mike Mohan re-emphasized the train’s message to customers:  “SP’s goal is to meet or exceed your needs!”

To this end, SP invested significantly in quality education, with a strong focus on the team approach.  All courses were rolled out in 1991.  Railway-specific training courses included team leadership training, facilitators training, and team members training.  Also included were courses for statistical process control and management quality improvement training.  By November, 1991, more than 600 team leaders had completed training, and 400 quality improvement teams had been formed, with approximately 12 percent of employees working on problem solving  (Delsanter, 2009).  By mid-1992, 900 teams were operating, with 20 percent of SP’s workforce participating in one or more teams, 25 percent of which were cross-functional.  Newly formed Regional steering committees included a “quality facilitator” to support team activities when a line supervisor was unsupportive.  These teams were dedicated to building customer satisfaction through a continuous quality improvement process. 

Launching a quality improvement process in record time takes total top management commitment and a clear understanding of the quality process.  SP has done this, with some of the most experienced “quality” people in the industry managing the CQI program.  Hallmarks of the program include strong leadership, role modeling and other involvement by top management; benchmarking; developing action plans; involving unions; involving managers in process improvement;  and providing quality education and team training for all employees.  Normally, these activities would have been done one at a time.  In SP’s case, they were done in parallel or almost simultaneously, but they were done correctly by knowledgeable leaders employing a combination of Juran, Deming, and Japanese quality concepts that best fit SP’s unique circumstances.

As of this writing (Spring, 1993), SP owner Anshutz appears to have been correct in his conviction that CQI was the correct survival strategy to bring about a successful turnaround.  While not yet getting SP to the break-even point, there was a $43 million improvement in the bottom line during 1991-1992, the first year of the CQI program.  It will not take nearly that much improvement in 1993 to make the company profitable.  By closely listening to what its customers want and by applying the quality process, SP is transforming itself into a customer-driven, cost-effective transportation provider.  If it continues at its present pace, it will be successful.

In 1996, Southern Pacific was the sixth-largest railroad in the U.S. with over $3 billion in revenues and over 15,000 miles of track.  At the end of 1995, an agreement was made with Union Pacific Corp. to purchase Southern Pacific Rail Corp. for $3.9 billion (Ortega, 1995). 

Copyright 2012 James L. Alyea. All Rights Reserved.

For more information, please contact Jimmy Alyea:

Carman, J.   (1993, Spring).  Continuous quality improvement as a survival strategy:  the
Southern Pacific experience.  California Management Review 35.3.  Retrieved from

Delsanter, J.  (1992, February).  On the right track.  TQM Magazine 4.1.  Retrieved from

Lustig, D.  (1992, October).  The “new” Southern Pacific.  Trains 51.10.  Retrieved from
ABI/INFORM complete,

Ortega, F.  (1995, August 4).  SP’s chairman turns attention to oil and gas and new areas.  Wall
Street Journal.  Retrieved from

Welty, G.  (1992, November).  SP’s quality comeback.  Railway Age 193.11.  Retrieved from


Tuesday, June 19, 2012

Total Quality Management - The Deming Award

Total Quality Management Case Study on the Deming Prize:  
Analysis of, “Deming’s Luster Dims at Florida Power & Light”

The key to managing a successful supply chain is balancing efficiency and responsiveness.  A supply chain manager must manage the little details without losing sight of the big picture in order to achieve total quality.  In this case study, Florida Power & Light lost sight of this while trying to win the Deming Prize.

In 1989, Florida Power & Light (FPL) became the first American company to win Japan’s prestigious Deming Prize for outstanding performance in quality control management.  FPL had established a $4 million quality-improvement program in 1985 several years after its company’s chairman visited a Japanese utility company that won the Deming Prize in 1982.  Although the award’s sponsor, the Japanese Union of Scientists and Engineers (JUSE), opened competition to overseas companies in 1986, no foreign firms applied for the award until 1989 when FPL decided to “go for the gold.”  According to FPL’s president at the time, Bob Tallon, applying for the Deming Prize provided FPL’s 14,000 employees with added incentive to accomplish needed quality goals (Kolody, 1989).

FPL entered the race wholeheartedly.  Instead of continuing  to implement the company’s 1985 quality-improvement initiative gradually, employees were given less than six months to meet Deming award requirements.  Rigorous weekly training courses were developed for first-line, nonsupervisory employees, and over 1700 teams were formed to come up with problem-solving solutions to reduce costs or improve efficiency.  Managers were required to master new managerial theories and complex statistical calculations.  Supervisors spent their time tracking and calculating dozens of cross-referenced indicators such as the percentage of street lights installed in 21 days.  A functional review team was required to document and analyze 800 different procedures for everything from conducting energy surveys to answering customer complaint letters.  An area manager of customer service for the utility’s commercial/industrial group summed up the rigid process and the avalanche of paperwork by stating that preparing for the exam was “grueling.” 

When FPL received the Deming Prize in November, 1989, company president Bob Tallon cited numerous instances of quality-improvement benefits received from applying Deming principles.  For example, the company had reduced the average length of customer power service outages from 100 minutes annually in 1982 to 48 minutes in 1989.  In the safety category, FPL had reduced lost-time injuries from more than one per 100 employees in 1985 to 0.42 in 1989.  Additionally, customer complaints to the Florida Public Service Commission were at their lowest level in 10 years.  FPL also had reduced its fossil power plant’s forced outage rate from 14 percent in 1986 to less than 4 percent in 1989, saving ratepayers $300 million that would have otherwise been spent on new generating units (“FPL First International Winner,” 1989).

At the same time, CEO James Broadhead acknowledged that there were “some glitches” in the system.  These problems were deemed by many, however, to have overshadowed the quality benefits.  Employees felt that the system was too bureaucratic and inflexible.  Many had put in long, extra hours to prepare the Deming application and the volumes of documentation.  First-line supervisors complained they could not get their jobs done because workers were attending problem-solving meetings every week.  Problem-solving teams were frustrated when they realized proposed solutions were being evaluated for procedures rather than for results and substance.  The Deming method was so rigidly applied to every team problem that something so simple as moving an office water cooler required that seven mandatory steps be followed.  Not only commonsense, but also customers took second place to following Deming guidelines.  Customer-service representatives were so pressured to answer calls quickly that they began issuing work orders for problems that could have been resolved faster over the phone.  In retrospect, one FLP official stated, “We had an internal revolt. . . .  Winning the prize became less important than the challenge of trying to meet the judges’ strict demands” (Bacon, 1990).

In response, FPL officials made sweeping changes during the months following receipt of the award.  The more stringent requirements of Deming’s quality program, though not abandoned, were pushed into the background.  The Quality Department was reduced from 85 full-time individuals monitoring the quality teams to 6, and the quality-related departments set up during the award application process to do statistical “quality reviews” were disbanded.  The number of tracked “quality indicators” were cut from 41 to 3.  First-line supervisors were included in training programs which began to focus on areas other than quality, such as supervisory skills and customer sensitivity.  Most significantly, the mandatory, often-dreaded “seven-step process” no longer had to be used for all problem solving.

The experience provided valuable lessons, including the need to bring all levels of employees into the program and to show them how all will benefit from it.  Mike Brunetti, FLP’s executive vice-president, now advises companies just beginning to implement quality management programs to start with the top and work down to middle management, then first-line management, and finally to first-line employees (Bacon, 1990).  Brunetti said FPL’s experience also showed that in addition to team activity, it is equally important to have policies that stress external and internal customer satisfaction, that improve coordination within the company, and that concentrate company efforts on a few priorities at a time.
Without question, FPL’s commitment to quality was 100 percent.  Although service quality was obviously enhanced and a new corporate direction resulted, FPL’s profitability did not reflect improvement comparable to their winning the award.  The path FPL followed in pursuing the Deming Prize marked the company as one of the most-cited companies that failed to implement total quality management (TQM) properly (along with the bankrupt Wallace Co.).  FPL’s experience with TQM is an example of what can happen when companies adopt new management techniques too wholeheartedly.  As one outsider remarked, “people seemed more interested in the appearance of quality and jumping through the internal TQM hoops than on quality itself” (Harari, 1997).  Today, the Deming methods share the spotlight at FPL with other management tools such as benchmarking and reengineering, and employees have the freedom to innovate and solve problems without having to follow one particular methodology.

Copyright 2012 James L. Alyea. All Rights Reserved.

For more information, please contact Jimmy Alyea:

Works Cited:

Bacon, D.  (1990, January).  A pursuit of excellence – Florida Power and Light offers strategies
for successful quality management.  Nation’s Business.  Retrieved from

FPL first international winner of Deming Prize.  (1989, October 18).  Business Wire.  Retrieved

Harari, O.  (1997, January).  Ten reasons TQM doesn’t work.  Management Review, 86.1. Retrieved from

Kolody, T.   (1989, October 19).  FPL captures Deming Prize:  utility lst U.S. firm to win award.  Retrieved from

Wiesendanger, B.  (1992, September/October).  Deming’s luster dims at Florida Power & Light. 
Journal of Business Strategy, 14.5.  Retrieved from


Friday, May 11, 2012

Analyzing Procurement Contract Risks

Analyzing Procurement Contract Risks
Supply Chain Case Study on: “Identifying Contract Risks and Contingency Planning”
by Jimmy Alyea

This case study’s thesis is that “the Defense Supply Center Columbus (DSCC) was justified in terminating for default an indefinite-delivery purchase order (IDPO) contract at a firm fixed price (FFP) when New Era Contract Sales (New Era) failed to supply coupling tubes as required by a June 29, 2006, delivery order.

Contract performance.
When New Era, a government contractor, made delivery on a July 6, 2004, IDPO received from DSCC for coupling tubes, a contract was formed.  The contract obligated New Era to supply parts for two years at a firm fixed price.  New Era’s pricing to DSCC was based on a two-year quote from its supplier, Harrison.  New Era’s contract with DSCC contained a standard supply contract default clause but no price adjustment clause.

When New Era received DSCC’s second IDPO on June 30, 2006, it found that Harrison had been sold and its new owner would not honor the original price quote.  On July 5, 2006, New Era asked DSCC to cancel its contract with no liability for either party because its supplier refused to honor the quoted pricing due to an increase in material costs.  When DSCC refused, New Era asked to negotiate a new price based on a new supplier’s higher price quote.  DSCC again refused and terminated the contract for default when New Era did not fill the order.  New Era appealed the decision to the Armed Services Board of Contract Appeals (ASBCA) based on the provisions of the default clause, Federal Acquisition Regulation (FAR) 52.249-8.
FAR 52.249-8.  
The clause stated DSCC’s default contract rights but provided an exception for contractor liability if the following occurred: “If the failure to perform is caused by the default of a subcontractor at any tier, and if the cause of the default is beyond the control of both the Contractor and subcontractor, and without the fault or negligence of either . . . .unless the subcontracted supplies or services were obtainable from other sources in sufficient time for the Contractor to meet the required delivery schedule.”

New Era’s opposing view of the thesis.
New Era believes that its nonperformance is excusable under FAR 52.249-8.  The refusal of its subcontractor’s new owner to honor the original price quoted to New Era was “beyond its [New Era’s] control and without its fault or negligence.”  Similarly, the subcontractor’s refusal to perform was also “beyond its [the subcontractor’s] control and without its fault or negligence” because Harrison had quoted an unusually low price two years ago and because the present cost of titanium had increased dramatically.  As a result, New Era’s subcontractor would have only been able to supply product from its distributor at a cost/unit of more than three times the original contract price.  New Era states that as a small business owner, it could not absorb the resulting $23,904.66 loss.

New Era also asserts that it had taken “all reasonable action” to perform the contract by looking for alternative sources from which to obtain the product in time to meet the contract delivery date.  However, since none of these alternative suppliers carried stock of the needed item and produced only on an “as-needed basis,” this option would not have enabled New Era to deliver in a timely manner.  Although DSCC offered to extend the delivery date in exchange for a $510.18 contract price reduction, New Era believed it should not have had to incur this extra cost because DSCC did not respond for eight months to New Era’s request to cancel the contract without liability because it could not perform.

Because these unforeseen circumstances regarding pricing and product availability were beyond its control, New Era asserts that it was not negligent in its nonperformance of DSCC’s June 29, 2006, order and should be discharged without liability from its contract with DSCC.

DSCC’s supporting view of the thesis.
New Era entered into a binding IDPO contact when it fulfilled DSCC’s July 6, 2004 delivery order, obligating itself to honor the offered prices for two years.  As the FFP contract contained no price adjustment clause, New Era accepted the risk of increased prices from its subcontractor.  Thus, New Era’s claim that a price increase was beyond both it and its subcontractor’s control was not a basis on which to abandon performance under the contract’s default clause.  New Era and its subcontractor did not take “all reasonable action” to perform because they could have provided the ordered parts, even though at a loss.

DSCC seeks affirmation from ASBCA of its decision to terminate New Era’s contract for default and to recover costs from having to reprocure from a new source.  The Board found New Era in default of the contract and affirmed DSCC’s actions and request for reimbursement for additional procurement costs.  The Board stated that renegotiating a contract because of a supplier’s price increase would defeat the purpose of a firm-fixed-price contract, which was to protect DSCC from price variations.  It also noted that DSCC had grounds for termination when New Era notified it on July 5, 2006, that it could not make delivery on DSCC’s second order.

Lessons for contract managers include the importance of protecting against contract risk and of making contingency plans.  New Era should have taken the time to understand the contract terms, particularly the implications of filling the first order of an IDPO contract at a FFP, as well as the consequences of default and the lack of a price escalation clause.   It should have also locked its supplier into a contractual agreement as to pricing and the subcontractor’s liability for default, instead of depending solely upon a price quote.  New Era would have ultimately been better off had it performed the contract at a loss and then brought suit against its supplier.  Good advice for contract managers would be to expect the best but plan for the worse, and when in doubt, seek legal advice quickly before a problem escalates.

Copyright 2012 James L. Alyea. All Rights Reserved.

Case Study Reference:
“IDENTIFYING CONTRACT RISK AND CONTINGENCY PLANNING” by Jack Horan, Contract Management, Aug., 2009. Retrieved from

Wednesday, May 2, 2012

Analysis of: “Purchasing’s Performance as Seen by its Internal Customers"

“Purchasing’s Performance as Seen by its Internal Customers:
A Study in a Service Organization”

SERVQUAL is a “gap” survey model that defines service quality by the difference or “gap” between what customers feel a service should offer (their expectations) and their perceptions  of the actual performance, based on five service quality dimensions:  reliability, responsiveness, assurance, empathy, and tangibles.  If the numerical score on a generic Likert-type scale for perceptions meets or exceeds the score for expectations, the customer service experience is considered positive.  Conversely, negative numbers indicate improvement is needed.  Service quality measured in this way is an attitude or a value judgment of a service rather than an objective assessment based on measurable standards.

Service quality as seen by external customers of an organization has been a focus of research since the 1980s.  The SERVQUAL survey instrument was developed using 22 items describing five service quality dimensions to determine service characteristics that are important to “external”  customers of retail businesses.  Limited research had been done on using the SERVQUAL model to study the service quality experienced by “internal” customers of an organization. This research study is important because of the increasing emphasis on the benefits of Total Quality Management (TQM).  This article describes a study to determine if SERVQUAL’s five dimensions of service quality are useful in measuring the qualities of service provided to  internal customers in the purchasing department of a service organization.

Research method. 
To determine if the SERVQUAL model holds true for internal customers, 132 questionnaires, describing 22 service-quality characteristics, were sent to internal customers of the purchasing department of a major university in the Midwest.  The response rate was 61 percent or 80 usable questionnaires.   Respondents rated the overall importance of the five service quality dimensions, and then were asked to rate each individual characteristic of the five qualities for an “ideal” purchasing department and for the university’s purchasing department.  The difference between the two was calculated to determine the service gap score of each item.   Both a mean gap score for individual characteristics and a gap score, each weighted by the overall dimension importance to the respondents,  were obtained.

The authors’ initial results indicate that all five dimensions apply to internal as well as external customers and can be useful to purchasing department managers to identify  “perceived” shortcomings of the department.   The results of the individual items assessed for an ideal purchasing department generally corresponded to the respondents’ overall assessment of the importance of each the five service quality dimensions.  Reliability is identified as the most important dimension with a 33 percent mean score, followed by responsiveness at 23 percent; assurance, 20 percent; empathy, 15 percent; and tangibles, 9 percent.  A comparison of the respondents’ expectations of an “ideal” department’s service characteristics with their perceptions of the “actual” service delivered showed a “service gap” for all characteristics.  However, the scores are toward the positive end of the scale, indicating that overall most internal customers felt that the department was doing a reasonably good job in meeting their service needs.

Cautions and questions about using the SERQUAL instrument by a purchasing  department to obtain service feedback from internal customers include defining what score  constitutes an acceptable gap and what actions may be taken to close an unacceptable one, as well as setting a general tolerance level cutoff for service items that need to be improved.  Previous service quality surveys may be used to help establish a tolerance level and a benchmark.  The process for interpreting the results should be clearly defined and a schedule set for regular review of service quality using SERVQUAL along with more traditional survey formats.  These decisions should be made before the SERVQUAL instrument is administered, keeping in mind that even the best departments may never be able to achieve the “ideal.”

Contact Jimmy Alyea:

Case Study Reference:

“Purchasing's Performance as Seen by its Internal Customers:  A Study in a Service Organization”
by Joyce A. Young and Dale L. Varble,  Aug., 1997
International Journal of Purchasing and Materials Management