Monthly Archives: February 2007

Supply Management Contract Writing, A Review Part II

When I reviewed Next Level Purchasing’s (NLP) (now the Certitrek NLPA) course offerings to date: Mastering Purchasing Fundamentals (Parts I and II), Savings Strategy Development (Parts I and II), and 14 Purchasing Best Practices (Parts I and II), I did so in two parts. In the first part, as I did in Part I, I presented an overview of the course, the key topics contained within, and a general discussion on why it is worth your time and money. In the second part, I dived into a few select topics, with kind permission, that serve to illustrate the quality and usefulness of the course to a procurement / purchasing professional. This post will continue the pattern.

In the first lesson, you are introduced to the six major purposes of a contract. These are:

Formalization of obligations and rights.
Written contracts formalize the parties rights and obligations in such a way that misunderstandings are minimized and legal remedies can be sought if required.
Control and allocation of risk.
A well-written contract will specify which party is responsible for all possible consequences and make sure that one party does not unfairly bear too much of the burden.
“Locking in” benefits.
A good contract will guarantee one or more benefits, such as performance, price, and/or warranty, for a long period of time.
Elimination of the need for further negotiation.
Negotiation takes time away from strategic activities that can reduce cost and increase performance – a contract locks in an agreement and minimizes the need for future negotiation.
Formalization of an agreement on exception handling.
Things inevitably go wrong. You can thank Murphy. However, documenting who is responsible and what corrective actions will be taken up front minimizes risk and loss as it allows for expedient and focussed resolutions.
To solidify an advantage.
Whenever you can identify a specific advantage that would not be realized in the conduction of business in the absence of a contract, you should formalize a contract.

In the third lesson, the course dives into three monetary remedies and three non-monetary remedies you can choose from in the construction of your performance clauses. Financially speaking, you could negotiate the right to withhold payment, cover damages, and liquidated damages. Alternatively, you could go a non-financial route and negotiate termination, specific performance, and injunctions.

Let’s dive into four of these briefly. Specific performance is a remedy that allows you to force a supplier to do exactly as the supplier promised to do. Injunction is a remedy that allows you to prevent the supplier from doing something. Chances are they would not appear in the same contract and serve complementary purchases. You’d use specific performance if you were buying a one-of-a-kind item, such as an original Van Gogh for your conference room (since you wouldn’t want a forgery) and you’d use injunction if a manufacturer was making a custom part to stop that supplier from making that part for anyone else (should that supplier stop doing business with you for any reason).

On the other hand, as you might have picked up from one of the other courses I reviewed, cover damages and liquidated damages are not the same thing. Cover damages refer to a calculated amount the seller has to pay for failure to deliver and occur when a buyer has to acquire the goods from another seller. They are generally calculated as the difference between what the buyer had to pay versus what the buyer would have paid if the supplier delivered. Liquidated damages refer to a fixed amount the seller has to pay for failure to honor an obligation, such as a fixed late fee for each day the seller is late. Whereas the premise behind cover damages is that the buyer loses money when the buyer has to obtain goods from a different seller, the premise behind liquidated damages is that the buyer suffers financial harm when the seller fails to deliver.

Finally, in lesson five on key commercial provisions, there is a very good discussion of the shipping clause, what needs to be addressed, and what questions you need to ask when writing this clause. If you are buying goods, this is one of the most critical clauses, since it determines when the risk transfers from the seller to you, the buyer, and who pays the various expected and unexpected shipping costs that can arise.

Shipping terms should address the method by which purchased goods are shipped, the carrier who will deliver (or at least which party has the right to choose the carrier), the party who bears the shipment costs, and the party who bears the risk of loss in transit.

That’s it for my review of “Supply Management Contract Writing”. So, assuming I have convinced you its worth your time, after acknowledging that neither Next Level Purchasing nor Sourcing Innovation practice law, that Next Level Purchasing and Sourcing Innovation are not rendering professional legal services with regards to this (online) class, that neither Next Level Purchasing nor Sourcing Innovation will be responsible for any contract, either in whole or in part, based on any material presented in the (online) class, whether used in whole or in part, go on over to Next Level Purchasing and find out more.

Supply Management Contract Writing, A Review Part I

Those of you following along will remember that I have reviewed three of Next Level Purchasing’s (NLP) (now the Certitrek NLPA) course offerings to date: Mastering Purchasing Fundamentals (Parts I and II), Savings Strategy Development (Parts I and II), and 14 Purchasing Best Practices (Parts I and II). This course, like the last three, is also worth the time and investment for any purchasing professional looking to advance her knowledge and career with a training program that can lead to a recognized industry certification (the “Senior Professional in Supply Management”).

According to NLP’s website, this course is designed to give you the skills necessary to minimize your procurement risks. Going way beyond the typical, dry explanations of contract law, through plain English examples and interactive exercises, this course is designed to teach you how to negotiate and write effective contracts and iron-clad terms and conditions.

The course promises that you will learn how to protect your organization from the disastrous effects of suppliers’ failure to perform, plus

  • How to decide if you need the protection of a contract
  • How to choose the most appropriate form of agreement
  • How to structure contracts
  • How to select, use, and develop language for methods of dispute resolution
  • How to write a contract’s key legal provisions such as indemnities and limits of liability
  • How to write a contract’s key commercial provisions such as pricing and delivery
  • How to write a contract’s key technical provisions such as specifications and warranties
  • How to make use of effective styles of contract writing
  • How to effectively proofread and organize contract revisions

… but it delivers much, much more! It also includes:

  • The primary purposes of a contract. (There are more than one!)
  • The differences between the ten most common forms of agreement.
  • Six different remedies that you can consider when writing a contract that covers what will happen if your supplier fails to perform.
  • A discussion of four different dispute resolution methods.
  • Common legal terms such as “force majeure”, “most favored nations”, and “choice of law” which have a distinct legal meaning despite the fact that they are typically not translated into English.
  • Stylistic guidelines that not only make your contracts easier to read, but reduce the number of objections your legal counsel will invariably have.

And even if you don’t write your purchasing organization’s contracts, the course is still worth much more than it costs – after all, if you don’t fully understand the language that lawyers love to use, how can you be sure that they are accurately capturing your agreements and intent?

So, after acknowledging that neither Next Level Purchasing nor Sourcing Innovation practice law, that Next Level Purchasing and Sourcing Innovation are not rendering professional legal services with regards to this (online) class, that neither Next Level Purchasing nor Sourcing Innovation will be responsible for any contract, either in whole or in part, based on any material presented in the (online) class, whether used in whole or in part, go on over to Next Level Purchasing and find out more.

Advanced Sourcing is Where It’s At

“Two Turntables and a Microphone”Forget (e-Sourcing Forum, [WayBackMachine]). Advanced Sourcing is where it’s at, and Aberdeen just proved it again.

Regular readers, especially those who followed my summer series over on eSourcing Forum, will know that my favorite statistic to quote is Aberdeen’s finding (from their “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” in June of 2005) that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify an average incremental savings of 12% above those that basic, price-focused auctions alone have generated “The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal”. This month, Aberdeen released the follow up on this study with which found that enterprises that are employing advanced sourcing techniques are still identifying an average savings of 11.9% per sourcing event. Furthermore, best-in-class enterprises are identifying an average savings of 13.7% per event. Considering that savings from basic sourcing techniques tend to reach saturation after a handful of events, the fact that these companies are not only fighting off stagnation but still thriving is exemplary of the power of advanced sourcing and negotiation, which includes bid optimization, cost modeling, flexible bidding, life-cycle sourcing, and Total Cost of Ownership / Total Value Management scoring techniques.

That’s why I spend so much time on true decision optimization for strategic sourcing – which, as I’ve pointed out before, must include the capability to capture all fixed and variable real-world costs accurately (including flexible bidding, tiered bidding, and life-cycle cost support), to accurately model real world constraints (which impacts cost modeling and TCO/ TVM), and to accurately solve the model (using an optimization algorithm that is sound and complete). True decision optimization for strategic sourcing supports and complements all aspects of advanced sourcing and negotiations, and I’m sure Paul Martyn will have more to say on the topic over on CombineNotes [WayBackMachine] as CombineNet was a report sponsor. (I also expect David Bush will analyze some of the key findings over on e-Sourcing Forum as Iasta was also a report sponsor – so be sure to keep your eyes on that blog as well.)

In the meantime, if you haven’t yet started to use decision optimization in your high-value or strategic events – and statistics are telling me that the vast majority of you are not, start evaluating and test-driving the solutions the market has to offer. After all, It Pays to be World Class.

Spend Analysis VI: New Horizons (Part 2)

Today I’d like to welcome back Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectifAI) who, as I indicated in part I of this series, is 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!

Federation

One of the most serious limitations of OLAP analysis is the schema structure itself — typically a “star” schema, where a voluminous “fact” or “transaction” file is surrounded by supporting files, or “dimensions.” In the case of spend analysis, dimensions are Supplier, Cost Center, Commodity, and so on; transactions are typically AP records.

Why is this schema limiting? Because there are only certain ways that a dimension file can be linked to transaction files, and it isn’t always clear which file ought to be the transaction file and which files ought to be dimensions. For example, suppose that the transaction file consists of AP transactions, and a dimension file consists of invoice line items. The problem is that the invoice line item file is “moving faster” than the AP file; i.e. for every invoice number that appears in AP, there are multiple invoice lines that match. Which invoice line item should we link to?

Well, we could invert the problem and build the dataset from the invoice detail file instead, except that we typically won’t have invoice detail for every AP record, so that probably won’t work. Here’s a couple of ideas that will work: (1) we could build a separate measure column for invoice line items, and include them as AP record equivalents (coercing the two record types into a common format); (2) we could drop the associated AP record whenever we have invoice line item data, and include the AP information inside those line items, redundantly.

There are other options, too.

But the essential problem is that we have two separate datasets, and we’re trying to join them at the hip. There is an AP dataset, and there is an invoice line item dataset, and never the twain shall meet, except artificially. Even when there is no granularity issue at all, and when one dataset can be normalized or snowflaked such that every matching line item can be joined through from the other, the amount of effort required to set up the index->index->index relationships can be daunting.

Instead, why not create two separate datasets, efficiently and quickly; and then as a final step, federate them together on a common dimension? Suppose the federation logic was “join” — in that case, we’d drill on an element in dataset A; dataset B would drill on the common dimension from A; and then A would drill again on the common dimension from B. What we’d see is the perfect join of all of the records from A and from B that shared a common key in the common dimension; and we’d have the ability to reference all data from any dimension of both A and B.

There are many forms of federation in addition to join — for example, “master-slave,” where we drill on A, and B shows us its common nodes; but does not feed those back to A. That relationship can go the other way, as well, from B to A. In addition, there’s a “disjoint” operation — show me all the nodes in B that don’t share a key in the common dimension with A (and vice versa).

Federation represents a key productivity enhancer for dataset creation, as well as a simplification to the dataset building process in general. Federation also passes the “usability” litmus test, in that the resulting datasets are much easier to understand than massive levels of index indirection and snowflaking, and have the potential to produce richer results.

The technical challenges for federation are considerable: maintaining multiple connections to multiple datasets; representing multiple data dimensions inside the context of a single data viewer; providing mechanisms for pulling data seamlessly from multiple datasets for reports and analyses; and last but not least, augmenting the OLAP engine to perform federation operations effectively and quickly.

Is federation worth it? I think so, emphatically.

This brings to an end our initial Spend Analysis series. Thanks for the opportunity, Michael; and thanks to everyone who took the time to wade through it.

As Eric said, this ends Sourcing Innovation’s initial series on spend analysis. I’d like to thank Eric for his enlightening posts and hope that you learned something from them.

Spend Analysis V: New Horizons (Part 1)

Today I’d like to welcome back Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) who, as I indicated in part I of this series, is 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 of the limitations of spend analysis derive from its underlying
technology. As I’ve discussed in previous installments, the extent to which spend analysis can be made more useful to business users is often the
extent to which those limitations can be hidden or eliminated. In essence: an analysis tool is useful to business analysts only if business analysts actually use it. Which means that there is a fine line that vendors must walk between delivering technology to business users, and shielding them from it — without going too far and creating an unnecessary vendor dependency.

In this installment and the next, we’ll look at a few advanced features that aren’t necessarily available today, but that should be possible to provide in future, without crossing that line.

Meta Aggregation

By definition, a spend transaction contains the “leaf” level of a
hierarchy only. Consider the following:

   HR Consulting
Mercer
Deloitte
IT Consulting
IBM
Accenture
Management Consulting
KPMG
CGI

Low level transactions typically contain “Mercer” or “CGI,” but
not “IT Consulting” or “HR Consulting,” because those intermediate
hierarchy positions (“nodes”) represent an artificial organization
imposed by the user, and have no reality at the transaction level.

Suppose, though, that I’d like to be able to treat intermediate nodes as though they had reality inside the transaction set itself. Simple example: I’d
like to derive a new range dimension based on the top level of the above
dimension. I want to know which consolidated groupings are at $0-$100K,
which are at $100-$500K, and so on. I don’t care about IBM or
KPMG any more; all I care about is aggregating my own groupings.

In mathematical terms, I’m asking for f(g(x)) — the ability to apply
dimension derivation to a previous aggregation step; and, inductively and more generally, to do the same to the meta-aggregated dimension itself.

In OLAP implementation terms, I’m asking the engine to treat the intermediate nodes from any dimension, at any hierarchy level, as virtual transaction columns rather than as dimensional nodes. The problem is, intermediate nodes aren’t static; they’re changing all the time. That means a dimension derived on artificial rollup values must be re-derived whenever the hierarchy of the source dimension is altered; and, since hierarchy editing must be a real-time operation (as I have argued in this series and elsewhere),  the dimension derivation must also be performed on-the-fly.

Tricky as this might be to implement, the logic is easy to specify from the business user’s perspective. The user simply picks a previously-defined dimension and a hierarchy level on which to base his new dimension, and he’s done.

Visual Crosstabs

The utility of Shneiderman diagrams (or “treemaps”) to display hierarchical information is well known; the BIQ site has a live example.

The treemap is useful because it is visually intuitive; in this example, the relative sizes of the rectangles represent the relative magnitude of spending. The colors indicate relative change in spending; red is bad, green is good; lighter green is better. Inner rectangles show the breakdown at the next level of the hierarchy.

Clicking inside one of the white-bordered rectangles provides an expanded lower-level view of the hierarchy; clicking the up-arrow button moves back up a level.

Now, suppose that rather than the inner rectangles showing a lower level of the same hierarchy, instead they showed the breakdown of spending
within another dimension entirely — i.e., a “visual crosstab.” The visual crosstab would not only show magnitudes, but trends as well.

Unlike with meta aggregation, where the user interface is simple and
the implementation complex, here the user interface is complex and the
implementation fairly simple. The utility of the visual crosstab will
depend strongly on the user interface — for example, how does the user change the resolution of the outer dimension to a different hierarchy level? What might that do to the level of the inner dimension? How might the user invert the view, so that the inner dimension becomes the outer, and the outer becomes the inner? Globally, how can the user be kept aware of what’s being viewed/inverted/clicked, and therefore be able to make sense of the result?