Monthly Archives: August 2006

Three Cheers for the EFF!

It’s my day off (from Sourcing Innovation), so I’d like to quote from a ZDNet article:

Barney, the plush purple saurian, likes to sing about love, hugs and kisses. But the dinosaur’s lawyers have taken precisely the opposite view when threatening Web sites that display less-than-flattering images of the plump T-Rex–a legal tactic that finally led to a lawsuit on Wednesday from the Electronic Frontier Foundation. The suit, filed in federal district court in New York, argues that trademark claims by Barney’s owners have threatened “free expression rights” by trying to rid the Internet of Barney parodies and negative depictions.

With the exception of lawsuits against unauthorized wiretaps and lawsuits against the RIAA, I think this is probably the most worthwhile lawsuit the EFF has undertaken in a while. After all, anyone who sends threatening letters promising immediate legal action as the result of a free expression parody deserves it in my book. Yes, I have a vindictive streak, but everyday I read about another software patent pirate suing someone because the pirate just happened to be the first person to be issued a patent on yet another obvious unoriginal idea (of which at least 95% are, see my previous posting on TRIZ in the Purchasing Innovation Series over on eSourcing Forum) under the assumption that it’ll be cheaper and easier for the sued to pay up than to fight it.

So visit the Source of All Evil site (and check out the original version of the page), applaud their bravery, and let me know if you believe there is a connection between Barney and the RIAA. (And I promise to post any threatening letters I get as a result of this post!)

You can support the EFF here.

The Sourcing Innovation Series: Part III

Yesterday was a quiet day. David blogged about beer, Jason blogged about Hype Cycles, Gartner, and Spend Management, The iPod: Contract Manufactured With Love (well, almost), and Measuring the Impact of War in Israel and Lebanon, and there was silence over at Vendor Management. The only activity was Eric Strovink’s comment to Dave’s post where he noted that we need to step back from the RFP “blunt instrument” a bit since simple but smart actions sometimes generate surprising results. More importantly, he asked Do we clearly understand the demand side of spend?. This is a very good question, and one I’d bet that we rarely really know the answer to. After all, if we did – we wouldn’t need “forecasting” tools, “demand measurement” tools would do just fine.

On a different note, I can tell you that not only are more leading bloggers crafting their predictions even as I type this but that you can look forward to at least one surprise guest contribution on the future of sourcing here at Sourcing Innovation in the next week. Note that my four-part (yes, 4) series on Optimization begins today on eSourcing Forum. As I mentioned earlier, it will explain why I agree with Tim that decision-optimization guided sourcing is about to enter into the sourcing mainstream in a big way.

Getting back to the future of sourcing, I meant what I said when I said that I believe that sourcing five years from now will not be the same as sourcing today. For starters, it will be a lot more strategic. After all, once the 800 pound gorillas incorporate basic procurement and sourcing functionality into their application suites and the open source start-ups provide you with free applications for the basic information gathering, negotiation, and contract tracking portions of your sourcing cycle, the only way a(n) (e-)Sourcing provider will survive is by taking sourcing to the next level and developing new applications that allow you to define, analyze, execute, and access a databank of multiple sophisticated sourcing strategies with ease. Whereas today RFXs are templated, in the sourcing world of tomorrow entire sourcing cycles will be templated with integrated optimization-based decision support analytical tools that will help you determine make-vs-buy, short-cycle vs long-cycle, internal vs shared innovation, etc. Total Value Management will be the norm, Lead Time Optimization will be automatically accounted for, and demand forecasts will be based on dynamically updating collaborative multi-channel analysis. Tactics will be automated … strategy will be everything. And I’m eagerly anticipating Jason’s response to this prediction!

The Sourcing Innovation Series: Part II

Two days ago, Tim “Mr. Perfect”* Minahan of Supply Excellence kicked-off the series with an impressive post entitled Sourcing Innovation: Predictions for the Future of Strategic Sourcing where he portended how decision support tools, such as advanced optimization-based analytics and role-based dashboards, would enable supply managers to examine and manage value-based sourcing decisions that were previously impossible due to insufficient data and limited analytical tools and discussed how sourcing networks would emerge to provide supply market intelligence, cost models, and category sourcing templates to provide invaluable content in context of the strategic sourcing process.    (* Thanks Dave!)

Yesterday, Tim Minahan followed up with Part II of his Predictions for the Future of Strategic Sourcing where he discussed supply chain sourcing and frontline sourcing which extend strategic sourcing (and e-sourcing) methods to supply partners and internal stakeholders, respectively. In the context of supply chain sourcing, Tim defined multi-tier sourcing, co-sourcing aggregates, and buy-sell arrangements. Even though these are not novel concepts, I agree that you will probably start seeing a lot more of these in the future as inflation and ever-increasing raw-material costs start forcing organizations into larger and more creative buys to maintain savings and affordable price points. However, I think the real vision in Tim’s post is in the frontline sourcing prediction. Change is inevitable. Enterprises will have to test market dynamics with regular purchases, particularly in categories like lodging, travel, and print and employ category-specific templates that guide users through the process of specifying requirements that will become more common as a methodology of not only institutionalizing but capitalizing on market knowledge.

However, in an effort not to be outdone, or at least an effort not to be left behind, Dave Stephens of Procurement Central jumped in with his views on The Future of Sourcing. Whereas Tim focused on processes that were going to revolutionize sourcing, Dave took a different track and tried to understand the economic and marketplace drivers that were likely to change the very nature of sourcing over the next few years.

Dave noted that he believed that natural resources will face steady upward pricing pressure for the foreseeable future – which then, whether pure economists like to view it as such or not – will likely translate into inflation (or decreased buying power if you like that better), that perhaps it’s time to hit the pause button on over-zealous “let’s beat up the suppliers continually” approaches, and that he believes we’ll see a recession of Sourcing functionality back into transactional systems, further speculating that he believes that 5 years from now customers will have a really tough time distinguishing Sourcing as separate from Procurement.

And now for the fun part – I unequivocally agree and vehemently disagree at the same time! Price pressures will continue to increase, and only the buyers that focus on innovation-based relationships will succeed at curtailing cost increases. Today’s best-of-breed sourcing functionality that differentiates the innovative non-transactional players from traditional transactional ERP players will eventually be bundled with the big platforms and there will be no difference in the fundamental capabilities. But sourcing five years from now will not be the same as sourcing today, just as sourcing today is not the same as it was five years ago. This means that while most of today’s niche players probably won’t be around in five years, those who understand the continually changing nature of sourcing and continue to adapt to it will be stronger than ever. Tim has already given us some hints on where sourcing is likely to go and what tomorrow’s solutions will look like and I’m sure David Bush and Jason Busch will offer up more in the days ahead (and I expect Doug Hudgeon will have some very interesting takes on the future of successful buyer-supplier relationships). And I’ll be sure to add a few breadcrumbs of my own as well. So stay tuned!

The Sourcing Innovation Series: Part I

Those of you following the blogs would have caught part one of Tim Minahan’s post over on Supply Excellence yesterday on Sourcing Innovation: Predictions for the Future of Strategic Sourcing where he discussed where he thought sourcing was going.

You will have also noticed the first paragraph where the post was at my request, and that I do indeed want to tap the top minds in the business for their view of the future of strategic sourcing and supporting sourcing technologies. I’m pleased to announce that over the next week or two you can expect to see similar posts on many of the other leading blogs in the space. The day after a post goes up, I’ll link to it from Sourcing Innovation, highlight some key points, possibly throw in a few of my own thoughts, and keep this as the center point for the next week or two. So keep your eyes on Spend Matters, e-Sourcing Forum, Procurement Central, and Vendor Management over the coming weeks. I’m not going to tell you who’s going to jump in, or when, but I will tell you that this series of posts is one series you don’t want to miss! (And since these blogs are among the leaders in the space, they are definitely your best bets!) I’m really looking forward to it. We’re going to prove that Jason Busch was right when he predicted that blogs may reshape media and the analyst business models!

Tim’s post is a great first post in the series. He predicts that we will see advances in guided sourcing, hybrid sourcing, supply chain sourcing, and frontline sourcing. In the first case, he has somewhat beaten me to the punch, as I also foresee a bright future for optimization-based sourcing, but since that is the topic for my next purchasing weekend series that is running over on e-Sourcing Forum until the fall, I’m going to leave you waiting for a few more days. In terms of hybrid sourcing, I think Tim is showing great vision. The emergence of the “hybrid sourcing model” that blends sourcing technologies with third-party supply market and sourcing intelligence is definitely coming, but at this time, I believe that only a few individuals see it clearly. I’ll admit that I’m a little fuzzy myself on what comes next, even though I think I know where its going – so this post is definitely a must read! I know I can’t wait for part II, which will be up by the time you read this, as I’m very intrigued to find out where Tim thinks frontline sourcing is going!

Should-Cost Modeling

Should cost modeling is the process of determining what a product should cost based upon its component raw material costs, manufacturing costs, production overheads, and reasonable profit margins. Knowing roughly what a product should cost transfers pricing power form a supplier to a purchaser, especially for strategic purchases.

To the best of my knowledge, there are not a lot of solution providers out there that specialize in the productions of tools and methodologies for should-cost models, but one such vendor is Akoya, a company that Spend Matters‘ own Jason Busch likes to blog about frequently (in such posts as “In-sourcing” Outsourcing, Direct Materials Costing and Spend Management, and Akoya: Next Generation Spend Analytics?). Recently, Akoya produced a short paper entitled Analytically Derived Should-Cost Information is Critical for Improving Product Margins: An Example for Cast Parts that, despite being focused on a specific commodity, had some sound generically applicable advice for should-cost modeling.

When a purchaser knows what a part should-cost, then she knows what she should pay for it. Thus, this knowledge is critical for identifying mis-priced parts, parts with high markups, parts improperly sourced with vendors who are not suited to produce the part, and overly complex parts in need of simplification and re-engineering. Knowledge of should-cost is critical for efficient design, sourcing and procurement. And, as indicated above, should-cost is much more than the price of metal. In other words, until you know roughly how much you should be paying, you do not know whether or not there is enough of a savings opportunity to justify a considerable sourcing effort.

If the difference between the approximated should-cost and actual cost of a product is roughly 20% or more, than that product represents a considerable savings opportunity and should be part of a strategic sourcing initiative in the near future. If the difference is 10% or less, than you are probably getting a good price on the product and should not spend too much time trying to negotiate a better price when much more significant savings opportunities await. If the difference is somewhere in the middle, then, once you have tackled all of your high discrepancy commodities, you should refine your analysis and tackle any for which the expected difference increases.

What should you do when you identify a potential savings opportunity from a should-cost analysis? According to Akoya, three things. First, the parts can be submitted to the vendors for re-quoting. It is frequently the case that when asked for a re-quote that the vendors will recognize and correct pricing problems. Second, it is sometimes the case that the parts are sourced with a vendor that cannot efficiently produce the part. In these situations, the part can be resourced with other, more appropriate suppliers. Third, the part may be redesigned to reduce its complexity and thereby reduce its manufacturing costs.