At the final stop on the Supply Management 2.0 Forum in Houston last week, Hess Corporation Supply Chain Specialist Carl Tatum revived the lively debate over the right key performance indicators (KPIs) for supply management success.

“We need something more than year-over-year cost reductions to prove our ROI,” Tatum told the audience of Houston area supply management executives.

(As Supply Excellence readers know, this statement contradicts comments from previous Forums panelists, including CPOs from National City Corporation and Alliance Bernstein.  These top procurement execs argued that, in the eyes of the CFO, hard-dollar cost reductions is the only KPI that matters.)

Tatum countered this mindset by suggesting a more profound measure: “The only metric that matters is year-over-year profitability improvement. In addition to lowering costs, procurement must quantify its role in impacting revenues by avoiding risks of supply disruptions and contributing to the long-term sustainability of the business.”

Responsible for supporting oil exploration and production activities for Hess, Tatum’s team is no stranger to risk management. New reports abound that the capital equipment and skills required to build new oil rigs and refinery capacity are in short supply, particularly in the far reaches of Africa or off the coast of Latin and South America. Competing for scarce drill bits or engineering and construction services to expand refinery capacity can be tougher than finding a Nintendo Wii at Christmas.

(And, yes Virginia, there are oil companies trying to tap new sources and improve refinery capacity. More on that in a later post.)

Such factors have prompted Hess’ supply chain squad to adopt a new goal: become the Customer of Choice to its suppliers.

“A customer of choice consistently receives competitive preference for scarce resources across a critical mass of suppliers in its database,” said Tatum, citing a recent Procurement Strategy Council report found that suppliers rated only 5% of customers as “customers of choice.”

At Hess, failure to attain this choice status could cost hundreds of millions of dollars a day in cost overruns and limit the company’s aggressive growth plans. The pillars of Hess’ Customer of Choice initiative include:

• Establish account and category managers: Hess account managers support internal customers in accessing innovation in the supply base and to reinforce contract compliance and process standards. Category managers are responsible for supply performance and supplier relationships on a global basis.
• Create consistent global processes: “To be successful, we must present a consistent face to suppliers with our strategic sourcing, contracting, and supplier management processes.”
• Adopt Web-based tools to improve transparency and collaboration with suppliers: A long-time user of e-sourcing tools, Hess recently transitioned to a single, integrated platform for spend analysis, e-sourcing, contract management, and supplier management. Tatum says Hess expects the common platform will improve visibility, efficiency, and supplier collaboration, and help reinforce standard processes.
• Improve spend visibility and forecast models to better project future demand: Hess uses a blend of automated spend analysis software and proprietary forecasting models to better project future demand and buying requirements. Tatum says blending historical spend visibility with future demand projections is key to providing predictable forecasts to suppliers. “We can predict our demand and spend four years out,” said Tatum. “This helps us more accurately commit business to suppliers so they can reserve or build capacity or skills for our requirements.”

Tune in tomorrow to learn more about Hess’ “spend intelligence” initiative.