Monthly Archives: September 2007

Is the End of the Big Box Retailer in Sight?

Not that long ago, Strategy+Business ran a very thought-provoking article entitled Big Impact in a Small Format that noted that small format retail stores are gaining popularity and traction in Europe and Latin America where the popularity of the big-box store may actually be on the decline.

According to the article, smaller stores that cater to the needs of local consumers, such as Beaumont in the U.K.’s East Midlands that offers takeout meals as well as traditional grocery and sundries in small(er) sizes and Oxxo’s in Mexico that caters to the local neighborhoods, are gaining popularity. This may be due to the fact that the consumer experience in massive retail establishments is becoming increasingly unattractive. The amount of time it takes to negotiate the seemingly endless aisles is a drawback to harried shoppers – a drawback only made worse by the checkout lines where line-ups are often long and slow.

Consider Chris J. Abraham’s recent post over on @ Supply Chain Management about why he will not shop at Walmart anymore. He’s fed up of Walmart not because he’s a fan of small business, not because Walmart treats their employees “poorly”, and not because Walmart imports most of its stuff from China and other oversees locations, but because a weekly trip now takes almost two hours (60 minutes to find everything and 45 minutes to check out), employees are scarce and not very knowledgeable when you can find one for a question, and customer responsiveness is downright poor.

I see his points – and I think a lot of people do. I dread going to Walmart when I only need two or three things – since they are usually located at three opposite corners and it takes me fifteen minutes at a very brisk walk to collect them if I know where they are, and double that if I don’t. And then there’s the wait – the self-checkout lines that rarely work, or the too few lanes always filled with customers who have a full cart. Convenience isn’t just about size and selection – it’s about the speed at which you can find what you are looking for. Maybe if Walmart divided up it’s store into multiple stores – one per item type – such as clothing, media, electronics, furniture, bed and bath, etc. Oh wait, someone already did that – it’s called a mall! And, unlike a Walmart, they often exist in urban areas – and you only need to go into the stores that have what you need. Furthermore, each store has it’s own checkout and, much more often than not, the staff will actually help you.

Now I know this isn’t a retail blog, and that I shouldn’t dwell on good retail store design, but the article is very relevant to supply chain, and sourcing. It contains a number of lessons that your sourcing team should take to heart. First of all, if you’re sourcing everything under the sun, you’re likely not doing anyone a favor. Besides the fact that you could be sourcing products that no one is going to use, you should probably be looking for ways to reduce SKUs, identify standard components, and reuse these components across product lines. Secondly, you should be identifying the differences in needs between the different groups you serve, and cater your strategies appropriately if your success is tied to their success. Thirdly, don’t be afraid to innovate – it just might be what you need to take your sourcing to the next level.

Aberdeen on Spend Analysis: Lost in the Trees

Today I’d like to welcome back Eric Strovink of BIQ. 

Aberdeen’s report on Spend Analysis (“Spend Analysis: Working Too Hard for the Money,” available free from Iasta and others) draws useful conclusions about the forest, but then, like many other studies in this space, loses its way in the trees. Consider this reasoning:

  • Wealthy people tend to be successful.
  • Wealthy people typically drive luxury automobiles.
  • Therefore, wealthy people are successful because they drive luxury automobiles.

Aberdeen seems to reason about spend analysis in the same way:

  • Best-in-class purchasing organizations tend to have bought spend analysis systems.
  • Best-in-class organizations typically have bought spend analysis from one of the “Big 3” SA vendors.
  • Therefore, organizations are best-in-class because they bought spend analysis from the “Big 3.”

Thus, when the report uses survey data to uncover the underlying reasons why best-in-class organizations are successful, it loses its way. Using circular reasoning, it offers up precisely what one would expect: the standard “Big 3” marketing messages. Those messages, most of which haven’t changed in years, are these:

  1. Automated spend classification. “Only we can classify your spend, with automated algorithms and Bayesian analysis and special databases and… and… well, the point is, you can’t do it yourself, you have to hire us.”
  2. Standard reports. “Our suite of standard reports is better than anyone’s. Why, you don’t even need a sourcing consultant or a sourcing expert on staff, our reports tell you exactly what to do.”
  3. Integration with RFx. “Buy our suite, because it’s all ‘integrated.’ Just ignore the fact that spend analysis doesn’t ‘integrate’ with RFx, that’s not important now.”
  4. Integration with Contract Management for ‘compliance.’ “Let’s fail to mention that you can create a rules-based Contracts dimension yourself in just a few hours, whether you have a CM system or not.”

I’ve addressed these points at length elsewhere (see, for example, Common Sense Cleansing and What Purchasing.com Got Wrong), so I won’t do it here, except to point out that every SA application worth its salt creates a rules system that automatically classifies and maps spend. That’s the whole point, after all. Aberdeen’s report confuses the process of rules system creation with the results of rules system creation. Once a rules system is built, by whatever methods, the end result is a system that automatically maps and classifies both current and future spending.

The above nothwithstanding, the report contains a fascinating chart that shows survey respondents’ opinions of the “importance” of data analysis, data management, reporting, and supplier content, plotted against those same respondents’ classifications of their “current ability” in those four areas. It appears that “current ability” deeply lags “importance” in all four of them. As Aberdeen says,

While organizations recognize the advantages that can be gained from technology deployment for spend analysis, they have still not bridged the gap between theory and practice. Across the primary steps in the spend analysis process, enterprises are generally unable to fully leverage their spend analysis solutions… [emphasis added]

Aberdeen fails to draw the obvious conclusion from this — namely, that legacy approaches to spend analysis are disappointing their users across the board, despite causing an uptick in procurement efficiency. This result ought to be a key conclusion of the study. Spend analysis is about analysis, after all, not about the mechanics of data preparation. In fact, the four key components of spend analysis are:

  • Powerful analysis and ad hoc reporting tools (“data analysis” and “reporting”)
  • Flexible and ultra-fast dataset creation (“data management” and “supplier content”)
  • Real-time dataset modification (“data management,” “data analysis,” and “reporting”)
  • Flexible deployment (Aberdeen doesn’t address this, but the SA space has changed: powerful spend analysis is now deployable for small dollars, on individual analysts’ desktops, without an organization-wide commitment).

All of these components are interdependent — for example, you can’t perform ad hoc analysis if you can’t quickly change the structure of a dataset. And, you can’t change the structure of a dataset if it’s shared with others, because the other users certainly won’t appreciate you changing things out from under them.

It really should be old news by now: data extraction, transformation, loading, familying, and mapping are processes that are easily automated by in-house personnel using modern tools, or by outsourced resources using those same tools. It’s a shame that Aberdeen chose to focus on the “old think” of cleansing — only the very first step of a spend analysis effort — rather than pursuing the most interesting of its own survey results.

Buy Now, Pay More Later (Without Good Supply Chain Finance)

Last month, SupplyManagement.com ran an article titled Buy Now, Pay Later that examined the repercussions for suppliers, and ultimately your business, if you fail to settle your invoices on time. According to Experian, the average business takes more than two months (61 days) to pay its bills and evidence gathered by the Federation of Small Businesses (FS shows it is increasingly common for large companies to bully suppliers into accepting extended payment terms of 60, 90, or 120 days from invoice receipt.

As will be further discussed in the forthcoming wiki-paper on Supply Chain Finance, this is counter-productive to the cost savings initiatives such actions are often driven by. For starters, as estimated by the Forum of Private Business (FPD), 40% of business insolvencies in the UK are prompted by late or disputed payments. Furthermore, a European Commission (EC) review recently approximated that over 450,000 jobs are lost each year as a result of such delays.

Late payment can put extraordinary pressure on suppliers, especially small and medium sized suppliers, which often desperately need cash to purchase equipment, raw materials, and, most importantly, meet their payroll. Furthermore, in addition to cash flow problems caused by late payments, many firms incur significantly extra costs for the time and money spent chasing payments and securing interim financing, usually at exorbitantly high rates.

All these costs do nothing but drive up the supplier’s cost of operation, and effectively, the price they will need to charge in the future to maintain enough profitability to survive. So even though it looks like you’re getting a deal in the short term by extending payment terms, in the long term, you’re simply driving up your price – and risking a major supply disruption if your supplier goes out of business while waiting for you to pay.

So instead of extending Days Payable Outstanding, consider looking at other strategies that can lower your cost of operations – such as improving forecast accuracy, just in time production, and low cost financing options that are available to you, as a large company, and not your supplier. Better forecasts lead to less missed opportunities and a reduced need to clear inventory at significant markdowns, just in time production reduces inventory costs, which is much better than just shifting them to a third party, and financing your purchase at prime or less will cost everyone less in the long run that forcing a supplier to take out short term financing at 20% to 40% per annum.

The 2nd Sourcing Innovation Series

Last week I kicked off the second Sourcing Innovation series with a prologue on spot market trading and how one of last year’s predictions on the future of sourcing might soon be coming to pass. A little over a year ago, Sourcing Innovation launched the first Sourcing Innovation series on The Future of Sourcing, which was also the first cross-blog series in the sourcing and procurement world. The goal was to bring the bloggers and visionaries, who are out in the trenches, together to collectively define what’s ahead and provide you – tomorrow’s leaders – the insight you’ll need to succeed in the sourcing and procurement world of tomorrow.

Although only eleven bloggers participated in that inaugural event, I consider it to be a smashing success – especially in a space where only a handful of regular-posting blogs exist. After that, sourcing innovation launched two more cross-blog series – Sourcing 2007 and The Top Three – and the last cross blog series had twenty different bloggers and visionaries participating. To date, roughly thirty different bloggers and guest authors have participated in the cross-blog series and I’m hoping that this one trumps them all. (I’ve sent out more than seventy invitations to bloggers and guest bloggers alike from across the supply chain space – including vendors, analysts, and consultants – in the hopes that the collective viewpoint put forth this year outdoes any report that you could buy from any research firm in terms of the scope of vision provided.)

This cross-blog series will run for the next two-and-a-half weeks and, as with the previous series, Sourcing Innovation will cross-reference every post and guest post that hits the blog-sphere to provide you with a single reference point to begin your exploration into what is likely to come.

Last year we found out that decision and analytics guided sourcing and hybrid sourcing strategies were on the horizon, relationships will take center stage, the focus will shift to demand management and cost avoidance, on-demand is coming big-time, and securitizing materials and capacity will be a common occurrence. I wonder what we’re going to learn this year?

P.S. If you have not received an invitation, and would like to participate, please drop me a line at thedoctor<at>sourcinginnovation<dot>com.

Hacket Evolves the Procurement Value Proposition

In Hackett’s latest Advisory Piece, Evolving the Value Proposition of Procurement: A Five Stage Model, Pierre Mitchell & Christopher Sawchuk present a five stage model (with three supply management stages and two customer management stages) that procurement executives can use to assess where they stand on the evolutionary scale of procurement service models. The five stages presented are:

  • Supply Assurance
    The goal is the right goods and services at the right place and the right time, with a focus on perfect order.
  • Price
    The goal is the right goods and services at the right price, with a focus on cost savings and avoidance.
  • Total Cost of Ownership
    The goal is lowest Total Cost of Ownership with a focus on quality, capital, ancillary costs, and opportunity costs.
  • Demand Management
    The goal is to reduce demand variance and complexity immediacy with a focus on reducing maverick spend and increasing customer satisfaction.
  • Value Management
    The goal is to increase business value derived from spend with a focus on overall operational metrics.

These stages are more or less correct – the one caveat is whether or not a company approaches them in the order given, or a slight variation. Some companies will start with a focus on price rather than cost assurance, and after achieving a basic mastery of TCO some companies will move on to trying to maximize value before trying to manage demand

In addition to laying out the stages of procurement mastery, they also have a number of insights from their book of numbers. First of all, world-class organizations spend proportionally more on strategic processes than their peers – and 27% more on sourcing strategy and analysis and 45% more on supplier management and development in particular. Secondly, 78% more world class companies actively involve procurement in the firm’s planning and budgeting process. Thirdly, world class organizations spend proportionately less on transactional processes – and 25% less on compliance management and 50% less on supply data management in particular.

Some of the best insights relate to their fifth stage, value management, where procurement has no other agenda than to advance and support the business strategy. This is harder to achieve than it looks since procurement:

  • can not use a parallel measurement system as it must be restricted to the metrics that define value for the organization as a whole,
  • must harness the power of supply markets to identify breakthrough business strategies instead of simply translating existing business strategies to supply markets, and
  • must make the business strategy development process itself a core competency.

Leaders of world-class procurement organizations don’t simply wait for a sea change in business leadership to evolve these value propositions. They sense when there’s an opportunity to elevate the firm’s game to the next level and then fill in the leadership void themselves. As they do this, they evolve not just themselves and their teams, but also evolve the concept of procurement as a whole, raising the stakes for all other firms to follow.

As with the majority of Hackett’s insight pieces, this piece is for members only, but it goes to show that with Hackett, the insights you get with advisory services are worth your time.