THEINCREDIBLEPAYBACK4948IncrediblePayback10/20/045:32PMPageiThispageintentionallyleftblankTHEINCREDIBLEPAYBACKINNOVATIVESOURCINGSOLUTIONSTHATDELIVEREXTRAORDINARYRESULTSDaveNelsonPatriciaE.MoodyJonathanR.StegnerAmericanManagementAssociationNewYork*Atlanta*Brussels*Chicago*MexicoCity*SanFrancisco*Shanghai*Tokyo*Toronto*Washington,D.C.4948IncrediblePayback10/20/045:32PMPageiiiThispublicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothesubjectmattercovered.Itissoldwiththeunderstandingthatthepublisherisnotengagedinrenderinglegal,accounting,orotherprofessionalservice.Iflegaladviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalpersonshouldbesought.LibraryofCongressCataloging-in-PublicationDataNelson,Dave,1937–Theincrediblepayback:innovativesourcingsolutionsthatdeliverextraordinaryresults/DaveNelson,PatriciaE.Moody,JonathanR.Stegner.p.cm.Includesindex.ISBN0-8144-7207-9(hardcover)1.Industrialprocurement.2.Purchasing.I.Moody,PatriciaE.II.Stegner,Jonathan,1954–III.Title.HD39.5.N4552004658.7'2—dc222004006192©2005DaveNelson,PatriciaE.Moody,andJonathanR.StegnerAllrightsreserved.PrintedintheUnitedStatesofAmerica.Thispublicationmaynotbereproduced,storedinaretrievalsystem,ortransmittedinwholeorinpart,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofAMACOM,adivisionofAmericanManagementAssociation,1601Broadway,NewYork,NY10019.Printingnumber10987654321SpecialdiscountsonbulkquantitiesofAMACOMbooksareavailabletocorporations,professionalassociations,andotherorganizations.Fordetails,contactSpecialSalesDepartment,AMACOM,adivisionofAmericanManagementAssociation,1601Broadway,NewYork,NY10019.Tel.:212-903-8316.Fax:212-903-8083.Website::32PMPageivDedicationForR.GeneRichterSept.20,1937–July28,2003WhenGeneRichterassumedtheroleofChiefProcurementOfficeratIBM,heknewhewastakingonatough,stubbornchal-lenge.However,healsoknewthatpurchasingheldthekeytoun-lockingcashthatIBMbadlyneededtoattemptaturnaround.ThenaysayerswerepredictingthatBigBluewouldbedividedupintoahandfulofBabyBlues—andthatwouldhavespelledtheendofthegiant’sholdontechnologyandinnovation.ButGenesawthepossibilities,andheleftafunandcomfortablepositionatHewlett-PackardinCaliforniatoreturntothesnowsofupstateNewYork,andtosave“anationaltreasure.”Itwasanofferhecouldnotrefuse.Genewasagiantinthesupplychainworld,aconsummateprofessionalknownforhisethicalandstraightforwardstance,thesamegenerousanddemandingguyinbothhispersonalandhisprofessionallives.HisfirsttrainingasajuniorbuyeratFordwassucceededbyeveryotherpurchasingposition,buthealwayscon-sideredhimselfabuyer.GenewastheonlypersontoreceivePurchasingmagazine’sMedalofExcellencethreetimesinarow,firstforBlackandDecker,nextforHewlett-Packard,andfinallyforIBM.Heunderstoodtheincrediblepaybackandwhatittooktoorganizeandstaffapower-4948IncrediblePayback10/20/045:32PMPagevfulsupplymanagementoperationbasedontechnology,thebestofthebestprofessionals,andspendmanagement.BythetimeheretiredfromIBM,hehadfreedup$9billionincash,moneythatenabledtheturnaround.WemuchappreciatedGene’sopenandenthusiasticsupportofthisbookproject,andweonlywishhecouldhavebeenheretore-ceivethefirstcopyoffthepresses.vi/Dedication4948IncrediblePayback10/20/045:32PMPageviContentsPrefaceixAcknowledgmentsxiiiIntroduction1Chapter1TheIncrediblePayback7Chapter2TenCommonMistakes49Chapter3HowtoBuildaFairAdvantageandCaptureTheIncrediblePayback70Chapter4WorkingwithSuppliers110Chapter5DevelopingIncrediblePaybackPeople,Organizations,andSystems147Chapter6MetricsforTheIncrediblePayback209Chapter7IncrediblePaybackConclusions235AnEpiloguefromDaveNelson251Index257AbouttheAuthors2674948IncrediblePayback10/20/045:32PMPageviiThispageintentionallyleftblankPrefaceSpendManagement,theTwenty-FirstBestPracticeIntennis,theserveistheonlystrokethatcanbecompletelycontrolledbytheplayer—nottheforehand,whichcanbeloadedwithanopponent’sspin,notthebackhand,whichcanbetoughformanyright-handedplayers,notthevolley,notthelob,whichputsgoodplayersindefensivepositions.Onlytheservewillconsistentlyputproperlypreparedplayersinthegame,andallowthem,iftheserveisstrongenough,togettonetandtaketheadvantage.Practiceyourserve—youropeningmove,yourproductlaunchroutine—untilitbecomessecondnatureandyoureyescanvisualizethetargetasyourmusclesdotheirwork.WhenwewroteThePurchasingMachinein2001,wesurveyed247companiestoevaluatetheirBestPractices,andwefoundthatal-thoughnoneofthemwerehighperformersinallareas,thereweresometwentyBestPracticesthatbuiltsuccess,andourwinnersex-celledatmorethanoneofthem.Honda,forinstance,excelsatsupplierdevelopmentbuthasbeenlessconcernedwithcomputersystems.Othershavethequalitychallengeknocked,buttheyhavenotadvancedtoaddressthedecentralization/centralizationopti-mizationequation.ix4948IncrediblePayback10/20/045:32PMPageixLookingbackonourdecisionsthatidentifiedthetwentyBestPracticesinsupplychainmanagementandtheTenBestcompa-nies,werealizedthereisatwenty-firstBestPractice,whichhasthe