Monthly Archives: January 2007

Show You The Money, Part II (Supply Chain Cost Avoidance Basics)

Yesterday we talked about the fact that the best way to save money is to avoid spending it in the first place and introduced you to the 4 F’s of Cost Reduction: Failure, Facility, Focus, and Finance. Today we are going to discuss focus and finance and point out the specific solutions and methodologies you can use to meet your goals of increased cost avoidance.

Focus
This refers to your market focus and how you address the market. More specifically, it refers to your marketing and sales costs. Don’t just let marketing outsource a campaign – there’s no guarantee the agency they select are going to get anywhere near the best prices for print and media production. If you need to bring an agency to help with your message – do so – it’s often a great idea, especially if they understand your target audience. But make sure they’re service costs are decoupled from the print and media production costs you can control and often save big on. Also, if your sales people don’t have the right message, or don’t attack the right audience, they will be wasting a lot of the companies money. It may sound like it’s their problem, and not yours, but the reality is that if they do not make their sales numbers, then your company’s demand will not hit its forecasts. This means that you will not be ordering as much as you thought, and if you cut a great deal that came with a big rebate once you ordered one million units, and you only order 900,000, you don’t get your rebate, you don’t hit your savings number, and all of a sudden it looks like its your fault. So make sure you have systems in place that allow sales to collaborate with engineering, marketing, and procurement and truly understand what they have to sell, what it can do for the customer, and who they should be targeting in their efforts. Also, if they sell more than they expected, they need to be able to inform you quickly so you can adjust your orders to meet a demand surge.

Finance
They say money talks and money walks. But they often fail to tell you that it’s easily the most expensive asset you have. You have to collect it, disburse it, protected it, pay taxes on it, and, more often than not, finance it. And that last one can really cost you a lot of money – even when you are not actually financing it yourself. The fact of the matter is this: if anyone, anywhere in your supply chain has to borrow a lot of money to meet the demands placed on them, they are probably paying a large financing charge, which is being rolled up into their price, which is inflating your price. Therefore, it is vitally important that you understand your supply chain, especially your tier one suppliers, and do what you can to mitigate financing whenever you can. If paying up front will mitigate the need for your selected supplier to take out a loan that costs them 5%, then they will be able to reduce your price by 5%. Unless you have an investment that will absolutely guarantee over 5% return, and that’s unlikely given the unstable nature of investments, then simply paying early can avoid 5% of otherwise non-avoidable costs.

Disbursing your money can also cost you a lot of money, especially if you have people who aren’t buying on contract and using the absolute best price that you spent a lot of time and effort negotiating and securing. Make sure you have a good contract and compliance management system in place to allow you to track your contracted costs, track purchases against those contracts, prevent, or at least alert you to maverick spend (sometimes it might be necessary, in order to prevent a disruption), and insure that suppliers are billing you what they agreed to.

To summarize, you can also save money by avoiding spend in the first place, and you do that with the right strategies supported by the right technologies and methodologies. Therefore, in addition to the nine technologies and methodologies I outlined in Show Me the Money!, make sure you also have the following technologies and methodologies in place to help you avoid spending that cash in the first place!

And now you also understand why I (will) also (keep) talk(ing) about companies like:

Show You The Money, Part I (Supply Chain Cost Avoidance Basics)

Last week, in Show Me The Money! I asked you to apply various technologies, methodologies, and strategies to stop your supply chain from hemorrhaging cash and Show Me The Money! And if you did everything I asked you to do, it would be a great start, as it would provide you a big, fat, increase on your balance sheet, but it’s not the whole solution. Even though I only addressed every aspect of your physical supply chain from raw material mining through final delivery to the end customer, I only addressed the physical supply chain. Furthermore, I only talked about cost reduction technologies, strategies, and methodologies – and the fact of the matter is the best way to save money is to avoid spending it in the first place!

So today, we’re going to talk about the other half of the supply chain, and for those of you who want a very simple classification, the cost avoidance half of the supply chain. Just like there are four areas where the right technologies, methodologies, and strategies will save you a lot of money, there are four areas where the right technologies, methodologies, and strategies will help you avoid spending money in the first place. They are the 4 Business F’s of Cost Avoidance (as opposed to the 4 F’s of Product Design, as brilliantly laid out by Eric Hiller in his The Fourth F post on Spend Matters).

The Four F’s

  • Failure
  • Facility
  • Focus
  • Finance

Failure
According to Aberdeen’s Global Supply, Visibility, and Performance Benchmark Report, the average company has had an average of two major supply chain disruptions per year and industry average and laggard companies are only able to meet customer-requested ship dates 40% of the time. Every time something goes wrong, it not only costs you revenue (lost sales, etc.), but it costs you had cash as you usually have to take expensive action to fix it. Thus, if you could prevent failure, you could prevent costly expenditures and revenue loss that, when combined, can easily break six, seven, and even eight digits.

So how do you prevent failure? You manage your suppliers and you manage your risk. How do you do this? Through visibility, enablement, and risk-mitigation strategies. Invest in a supply chain visibility system to always know where your parts are, where your parts’ components are, and where the raw material is coming from. If your supplier has a temporary shutdown, you need to know. If their supplier runs into a problem, you need to know. And if the mining company had a shortfall, you need to know. With enough lead time, you can relay an order to another preferred supplier, inform your supplier that they may need to follow up with their supplier to make sure they have the components when they need it, or lock up additional raw materials in a different part of the world – preventing a supply chain disruption long before it happens. With a supplier enablement system, you can not only help them inform you of potential problems before they happen, making sure that such problems are resolved before they occur, but you can help them improve their efficiency, which will ultimately lower your costs even more. Risk mitigation doesn’t require a system, just good planning. Make sure you have at least two suppliers for key purchases – or if they are custom made, and dual-sourcing is difficult, make sure your chosen sole-source supplier has multiple plants where the components could be produced – preventing against disruption by natural disaster or political unrest in a specific region.

Facility
Facility can be defined as readiness or ease due to skill, aptitude, or practice, in other words, facility relates to your level of productivity. Just because you can’t do much about your labor costs, as wages are more-or-less set by the market, that doesn’t mean that you can’t maximize your return. Maximizing your productivity will allow each of your resources to do more, effectively lowering your overall cost for each unit or service you offer. In addition to the strategic sourcing, spend analysis, and award optimization systems I highly recommended you provide to each of your buyers (as such systems have been proven to reduce cycle times by an average of 66% or more), I also recommend providing them with good collaboration, e-Procurement, and Procure-To-Pay systems. Collaboration systems allow remote groups to work together more effectively and e-Procurement and PtP systems greatly simplify the actual ordering and payment processes, allowing your users to spend less time on tactics and execution and more time on strategies to reduce and avoid costs.

Come back tomorrow for a discussion of focus, finance, what-to-do, and where-to-go!

Spend Analysis III: Common Sense Cleansing

Today I’d like to welcome back Eric Strovink of BIQ who, as I indicated in part I of this series, is going to be authoring the first part of this series on next generation spend analysis and why it is more than just basic spend visibility. Much, much more!

Many observers would acknowledge that there’s not a lot of difference between
viewing cleansed spend data with SAP BW or Cognos or Business Objects,
and viewing cleansed spend data with a custom data warehouse from a
spend analysis vendor. They’re all OLAP data warehouses; they all
have competent data viewers; they all provide visibility into
multidimensional data. What has historically differentiated spend
analysis from BI systems is the cleansing process itself (along with,
in contrast to the BI view, the decoupling of data dimensions from the
accounting system).

Because it’s hard to distinguish one data warehouse from another, cleansing has
become an important differentiator for many spend analysis
vendors. The vendor has typically developed a viewpoint as to
the relative merits of manual labor/offshore resources, automated
tools, custom databases, and so on, and sells its SA product and
services around that viewpoint. Unfortunately, all the resulting
hype and focus on cleansing services, from both these vendors and the analysts
who follow them, has obscured a simple reality –
namely, that effective data cleansing methods have
been around for years, are well understood, and are easy to implement.

The basic concept, originated and refined by various consultants and
procurement professionals during the early to mid-1990′s, is to build
commodity mapping rules for top vendors and top GL codes (top means
ordered top-down by spending) — in other words, to apply common sense 80-20
engineering principles to spend mapping. GL mapping catches the
“tail” of the spend distribution, albeit approximately; vendor
mapping ensures that the most important vendors are mapped correctly;
and a combination of GL and vendor mapping handles the case of
vendors who supply multiple commodities. If more accuracy is
needed, one simply maps more of the top GLs and vendors. Practitioners routinely
report mapping accuracies of 95% and above. More importantly, this
straightforward methodology enables sourcers to achieve good
visibility into a typical spend dataset very quickly, which in
turn allows them to focus their spend management efforts (and
further cleansing) on the most promising commodities.

Is it necessary to map every vendor? Almost never; although third-party vendor mapping
services are readily available, if you need them. And, as far
as vendor familying is concerned, grouping together multiple instances
of the same vendor clears up more than 95% of the problem.
Who-owns-whom familying using commercial databases seldom
provides additional insight; besides, inside buyers are usually well
aware of the few relationships that actually matter. For example,
you won’t get any savings from UTC by buying from Carrier and
from Otis Elevator. And, it would be a mistake to group Hilton
Hotels under their owners, since they are all franchisees.

[N.B. There are of course cases where insufficient data exist
to use classical mapping techniques. For example, if the dataset
is limited to line item descriptions, then phrase mapping is
required; if the dataset has vendor information only, then
vendor mapping is the only alternative. Commodity maps based
on insufficient data are inaccurate commodity maps, but they
are better than nothing.]

80-20 logic also applies to the overall spend mapping problem.
Consider a financial services firm with an indirect spend base.
Before even starting to look at the data, every veteran sourcer
knows where to start looking first for potential savings:
contract labor, commercial print, PCs and computing, and so
on. Here is a segment of the typical indirect spending
breakdown, originally published by The Mitchell Madison
Group
:

If you have limited resources, it can be counterproductive to start
mapping commodities that likely won’t produce savings, when good estimates
can often be made as to where the big hits are likely to be. If you can score some
successes now, there will be plenty
of time to extend the reach of the system later. If
there are sufficient resources to attack only a couple of
commodities, it makes sense to focus on those commodities alone, rather than to
attempt to map the entire commodity tree.

The bottom line is that data cleansing needn’t be a complex,
expensive, offline process. By applying common sense
to the cleansing problem, i.e. by attacking it incrementally
and intelligently over time, mapping rules can be developed, refined,
and applied when needed. In fact, whether you choose to have an initial
spend dataset created by outside resources, or you decide to create it yourself,
the conclusion is the same:
cleansing should be an online, ongoing process, guided
by feedback and insight gleaned directly (and incestuously)
from the powerful visibility tools of the spend analysis system
itself.
And, as a corollary, cleansing tools must be placed directly into the hands of
purchasing professionals so that they can create and refine
mappings on-the-fly, without any assistance from vendors or internal IT experts.

Next: Defining “Analysis”

Don’t be a Victim of the Performance Gap (Procurement Best Practices)

According to the Hackett 2006 Enterprise Book of Numbers, there is a growing performance gap in sales, general and administrative operations between world class and average companies with top performers generating significant savings while delivering improved effectiveness and reduced risk. Don’t have a copy? No worries – the IACCM ran a great summary article last month.

Hackett’s research found that by achieving world-class performance in four core operational areas – information technology (IT), finance, human resources (HR), and procurement – companies can reduce annual SG&A costs by $60M per B in revenue. At the same time, these world class performers show superior effectiveness, deliver higher quality services, and benefit from increased economic returns and reduced risk.

In addition, Hackett found that world-class performers demonstrate strength in five best practice categories: strategic alignment of business goals and operating procedures, complexity reduction, technology enablement, business processing sourcing; and cross-functional partnering. Furthermore, the strategic use of technology plays a key role in achieving world-class performance.

The article also quotes Pierre Mitchell (who needs no introduction) who states that “The best companies may differ in their size, industry or regulatory environment, but what they share is their ability to use back-office functions, traditionally viewed as cost centers, to generate competitive advantage. They do this, regardless of function, by relying on specific management approaches in the five areas we’ve identified.” World class organizations support continuous improvement within individual functions, cross-functionally and in end-to-end processes. “It’s critical to recognize that each year these world-class performers do a little better, pulling further away from the pack. The growing gap has a multiplier effect that will make it more difficult for the lagging typical companies to compete over time, a process that may soon be irreversible for many of today’s leading corporations.”

The Hackett group key findings across various SG&A functions were as follows:

Strategic Alignment
World class organizations use “flatter” management structures that are more effective. Furthermore, the senior IT executive is almost 50% more likely to be on the company’s primary management team.
Complexity Reduction
World class organizations achieve tangible benefits by abolishing unnecessary complexity in business processes. World class procurement organizations reduce complexity through strategic sourcing, consolidating their purchases among 78% fewer suppliers than typical companies, and centralization. (Hackett found a typical company with 1B in annual spend can save 8M in process cost alone by increasing the percentage of contracts negotiated centrally from 20% to 80%.)
Technology Enablement
Companies with world-class IT organizations spend 7% more per end user than their peers and their use of technology results in improved performance across other SG&A areas. Appropriately applied technology streamlines and automates operations and world-class organizations spend 45% less than typical companies on finance operations.
Business Process Sourcing
World class companies leverage business process sourcing options at the process level and do not hesitate to change sourcing solutions if they fail to meet the desired results.
Cross-Functional Partnering
World class organizations seek synergies across business functions through cross-functional cooperation to achieve common goals. Procurement staff work alongside their functional peers to understand business need, plan spending and supplier selection, and take into account current and future needs.

So don’t get stuck in the procurement gap – take Hackett’s advice to heart and join the world-class organizations who are saving an additional 6% per year on their procurement efforts. Don’t know where to start? Since technology is key, start by adopting state-of-the-art on-demand strategic-sourcing solutions, such as those offered by Iasta and Procuri.

Holocaust Memorial Day

Today is Holocaust Memorial Day. Considering the recent surge in

Holocaust denial, so much so that even Scott Adams could not avoid blogging about it, that makes this an important day. Think about it.

Progress, far from consisting in change, depends on retentiveness. Those who cannot remember the past are condemned to repeat it.

     George Santayana, The Life of Reason, Vol. I: Reason in Common Sense