Monthly Archives: December 2007

The Wit and Wisdom of the SpendFool Revisited

One year ago today, I brought you The Wit and Wisdom of the SpendFool, culled from all of the foolish comments I could find over on SpendMatters. The SpendFool was also kind enough to leave some very juicy tidbits again this year, but in case you missed them, here are the highlights.

The Wit

From Risk & Supplier Performance — When Conventional Wisdom Isn’t:

In MY next guest article, I will play an Aberdeen analyst and argue that the conventional wisdom of “cross-functional teams are a waste of time” is indeed false by proving that “Leading CPOs are 2X more likely to emphasize procurement team management”.

From Buick: Crap or Crème De La Crème?:

No amount of Tiger Woods commercials will be able to save the design-by-committee Rendevous. That is one “Coyote Ugly” vehicle. They ought to make it even uglier and turn it into the new version of the old VW “The Thing”.

From Emptoris Targets Ariba/Procuri Customers … Only 2 Hours After the Deal News Breaks!:

“Hello, pot? Yeah, this is kettle, you’re black!”

From Emptoris Grows, Trash Talks Competitors:

Captain, it’s not logical to attack the Borg and the cling-ons. It’s not worth your tribbles. Focus on the enterprise.

- and –

From A Gift for Your Favorite Supplier This Holiday Season:

In the beginning was the Plan.
And then came the Savings Targets.
And the Targets were without form.
And the Forecasts and the Budget were without substance.
And darkness was upon the face of Procurement.
And the purchasing agents spoke among themselves, saying, “This is crock of sh*&, and it stinks.”
And the purchasing agents went unto their Senior Buyers and said, “It is a pail of dung, and we can’t live with the smell.”
And the Senior Buyers went unto their Commodity Managers, saying, “It is a container of excrement, and it is very strong, such that none may abide by it.”
And the Commodity Managers went unto their Regional Directors, saying, “It is a vessel of fertilizer, and none may abide its strength.”
And at the annual global Procurement conference, the Regional Directors said to the CPO, “It contains that which aids plant growth, and it is very strong.”
And the CPO went to the CFO, saying unto her, “It promotes growth, and it is very powerful..”
And the CFO went to the President, saying unto him, “This new Procurement plan will actively promote the growth and vigor of the company and in these areas in particular.”
And the President looked upon the Plan and saw that it was good.
And the Plan became Policy.
And that, my friends, is how sh%& happens.

The Wisdom

From Why 80% is not Enough … :

“Do a mega-lot with both basic and advanced requirements, and you’ll indeed get the 80% solution which does leave money on the table (payback is indeed usually after 1-5 events). So, break up the market basket between analytics, RFX, contracts, scorecards, portals, yada yada and then build humpty dumpty up. Worst case, you get a good discount on the 80% solution (which ain’t cheap and certainly doesn’t come often). Best case, you get the right tool for the job, take the money on the table, and then re-bid in 3 years when SAP/Oracle have their next-gen polyrazzmatazz suites. The money you’ll save on hundreds of events during that time will make everything else noise (except for maybe the ERP upgrade costs). Why do you think BoB (aka “Bondo”) vendors are filling those holes so well these days. Buyers are generally not stupid and markets are generally efficient. Generally. With 0.7 probability for those reading in Stamford.

From Risk & Supplier Performance — When Conventional Wisdom Isn’t:

When supplier performance increases, you get the right stuff at the right place at the right time at the right quality, etc. Seems like risk goes down when all is right, no?
As the good Dr. said … “The better performing suppliers also had the lowest risk level as measured by our model”. Makes sense, what you measure is what you get, and since firms measure pretty much along these categories, that’s what they indeed do get. So, the conventional wisdom is indeed wise and now empirically proven. Q.E.D.

From Emptoris: Going Under the Numbers:

On the topic of contract management:
They’ve been subsumed as a component of a BoB spend management suite. That’s fine, but let’s not delude ourselves into thinking that these vendors are really going to be viable, long-term players in enterprise contract management. Yes, it’s a dessert topping AND a floor wax! Puh-lease. They don’t have even the horsepower to invest in decent integration to the back office for the Procurement stuff. Ask for references and enjoy the ensuing tap dance.

From What Does ISM’s New Board Composition Mean?:

Supply Management is about harvesting the power of supply markets, not catering to stale incumbants who are chummy with the top brass. …
When I look for innovation in supply management these days, it’s more likely to come from technology vendors and niche consultants than the flip charts from the last elk lodge session in Boca Raton.

From Wrong or Right? Equating Supply Chain Performance with Spend Management:

Why does a good discussion on the impact of Procurement devolve into vendor CMOs strutting their little peacock feathers on niche (albeit important) sourcing techniques. Did you know that Flavia coffee systems were used at 70% of these firms versus 40% adoption at low-performers? Clearly, using Flavia (winner of the Tweedleman award for worker caffeination) is a key predictor of supply chain excellence. I think there’s a pending Aberdeen report on it – Jamie will make it say whatever you want it to. Also, did you know cocaine users are 10x more prone to using caffeine than non-cocaine users (even more in Rome). So is caffeine a SCM best practice or a gateway drug to hell?

A better discussion is talking about how supply management (the process – not the renamed Purchasing department) supports the operational excellence capabilities that allows AMR’s named firms to excel: lower inventory via supplier consignment/VMI and lower cycle-times; reduced price and non-price factors; faster NPI processes, better products through supplier innovation, etc. Also use it to reduce trade-offs between cash, cost, delivery, etc. Read AMRs heirarchy of supply chain metrics if you haven’t.

and, finally,

From Why I’m Not a Poet:

On the topic of the doctor‘s literary genius
  The student has indeed become the master. You are truly foolish.I lay my bells at your feet.

I hope that this means that the SpendFool will stop lurking and start offering up some of his wisdom on this blog. (Comments may require an e-mail, but there’s no reason it can’t be an anonymous e-mail account on a free server.)

AT Kearney’s Sustainable Supply Chain

Last month, the Supply Chain Management Review published The Sustainable Supply Chain by Daniel Mahler that was based upon a joint study to assess corporate sustainability practices by A.T. Kearney and the Institute for Supply Management. The study found that sustainability efforts have started in a number of firms, and that it appears that a growing number of companies have started to put in place specific, comprehensive sustainability strategies for internal operations and external relationships. However, this also means that a number of firms have not yet embraced sustainability.

The article notes that it’s time for “wave two” sustainability – for companies to move beyond simply saying what’s right to doing what’s right and make sustainability happen – and I have to agree. Especially since the process of moving to sustainability, at a high level, isn’t that hard. It’s just like every other initiative and can be summarized as per the article:

  • Devise a Sustainable Strategy
    This will require a lot of research, rolling up the sleeves, and putting in the hours to get it done – but considering that 36% of firms surveyed have a formal sustainability strategy for managing their supply chains, it’s obviously doable.
  • Retool the Organization
    The study found that more than one-half of companies evaluate supply management executives against some sustainability standards. For sustainability to be taken seriously, everyone should be measured against it. We need 100% of companies adopting standards and making sustainability a priority.
  • Manage Supplier Relations
    Your supply chain isn’t sustainable unless it’s sustainable end-to-end. You need to make sure your suppliers also institute sustainable practices, and work with them if they need help.

The article also offered up some guidelines for going forward that weren’t too bad. In summary:

  • Survey the Strategic Context
    Start by understanding your economic, environmental, and social priorities.
  • Understand Risks and Opportunities
    A primary goal of your strategy should be to limit the exposure of your supply chain to social and environmental risks as well as future supply-demand imbalances.
  • Get Ready.
    Update your strategy, processes, and operations as required.
  • Set Priorities.
    Set formal priorities for implementing plans based on ease of implementation and expected value. Make sure the targets are measurable and visible!
  • Go!
    Just Do It!

Remember, sustainability is not only a chance to contribute to societal good, but also a powerful source of competitive advantage in the burgeoning environmentally-conscious economy.

Fortune’s Dumb Supply Chain Moments

Fortune recently posted their 101 Dumbest Moments in Business for 2007. I found the following five supply-chain related moments to be quite humorous.

Free Virus for All!

A Belgian IT security consultant, testing Google’s ability to block harmful advertising, posts an add that reads “Is your PC virus-free? Get it infected here!” Google accepts its, displays it 259,723 times, and 409 web surfing morons actually click on the add!.

Yeah, I’d like that e-book, those mp3s, and a new virus for my PC. The 27 viruses currently on my machine are only slowing it to a snail’s pace. I’m sure I can get it down to sloth-speed!

Supply Chain Lesson:

Make all of your processes and e-tools as idiot proof as possible. There’s no telling what a moron will do given the opportunity!

Who’s Murphy?

On July 24, San Francisco data-center operator 365 Main issues a press release touting its 24/7 reliability: “In the unlikely event of a cut to a primary power feed, the state-of-the-art electrical system instantly switches to live backup generators, keeping the data center continuously running.” That day a power outage hits and three of its backup generators fail, taking down high-profile customers including RedEnvelope, Technorati, and Craigslist.

We’re not the Titanic! We won’t sink!

Supply Chain Lesson:

It doesn’t matter if you never met Murphy, his laws still apply! Don’t … Get … Cocky! You can never do away with risk!

VaporTech

John Griffin, CEO of a Livermore, California, startup, pockets about $750,000 of seed capital after lying to investors lured by the company’s promise to develop a “dirt eater” to clean toxic soil. After reportedly spending the money on such necessities as a Ferrari, Super Bowl tickets, and steroids, Griffin is sentenced to 30 months in prison. The name of the startup: VaporTech.

VaporTech isn’t the name of a cool new technology powered by steam – especially considering steam-powered devices have existed for almost 2000 years. (Remember the aeolipile from engineering history class?) It’s another name for VaporWare, which is a software or hardware product that is announced, but never emerges.

Supply Chain Lesson:

If it’s too good to be true, it probably is.

They don’t call it the European Union for nothing!

To highlight its role as a patron of the arts, the EU posts a mashup on YouTube featuring two dozen sex scenes from movies it has funded, followed by the line, “Let’s come together.”

Maybe that’s why the Fitworld gym in Heteren (in the Netherlands) introduced Naked Sunday.

Supply Chain Lesson:

No comment!

My factory for a screw!

Literally! A worker in a German screw factory smuggles out 2,000 to 7,000 screws per night, ultimately stealing more than a million units. He sells the screws below cost on the Internet, artificially depressing the entire screw market.

Supply Chain Lesson:

Don’t forget security!

The Amazon Effect Is Aptly Named

CPO Agenda recently ran an interesting article in their Winter edition called The Amazon Effect which, although it asked a good question, did not, in my opinion, give a full answer. The article made a great point when it noted that many users find traditional e-Procurement systems frustrating when compared with consumer websites. This is one of the main reasons why CAPS Research in 2006 found that only 36% of total spend goes through an e-Procurement system in most organizations, as quoted by the article. The reality is that systems like SAP are so complicated, that even experts have problems.

But let’s get one thing straight – even though, as Aberdeen pointed out when it noted that efficient e-Procurement initiatives increase the spend under management by 35% in an average organization while reducing maverick spending by 41%, implementing a user-friendly e-Procurement system will go a LONG way towards increasing organizational use (and maybe even lead to a 433% improvement in spend under management in extreme cases), it won’t solve all your problems. Let’s face it – not everything you buy is office supplies or other products that neatly fit with the “shopping cart” system that so many vendors these days are trying to reduce their e-Procurement systems to. Can you put a “temp labour worker” in a cart? (In the US? Legally?) Can you put “customized machining services” in a cart? Can you put a non-catalogue one-time buy in a cart? Depending on the flexibility of the cart application, the answer could be a resounding no.

The strength of an e-Procurement system lies not in its look and feel, but in how much organizational spend it can capture – since that’s where the true value of an e-Procurement system is. Usability is important – but if the system can’t capture non-traditional spend, and can’t do so in a straight-forward and efficient manner, users will continue to bypass the system regardless of how slick it’s cart interface is. It’s time to wake up and smell the coffee – enterprises aren’t consumers. They don’t go down to the local office supplies store and buy a ream of paper, a pack of pens, and a can of coffee for the home office. They buy office supplies by the palette, custom products by the thousands, or millions, and temp labor services on the fly. If you can’t handle that – then nothing else matters.

So, the Amazon Effect is merely that – an effect. It’s not a solution.

Capacity, Inventory, and Lead Time

Recently, Supply and Demand Executive published an article called The Three Things You Need to Get Right in Your Extended Value Chain by Steve Mehltretter and Vadim Kapsutin which suggested that there are only three critical operational resources that businesses need to balance and get “right” in order to succeed:

  • capacity
  • inventory
  • lead time

Although I don’t agree that the problem is this simple, I do agree that these are three key operational levels that need to be well understood if a business wants to improve its operation and that the authors are right when they state that most companies struggle with effectively optimizing these resources holistically and in an integrated fashion across the extended enterprise. I agree that few companies understand their interactions well enough to make explicit and accurate trade-offs between them and take a “silo” approach to optimizing each resource independently and that this frequently leads to poor cost, quality, and delivery performance. These issues really need to be looked at as a whole, and not as three distinct problems.

The authors also note that operations research experts can derive the interactions and trade-offs on a mathematical basis, but the question of how managers can use the insight to make the right decisions within their organizations still goes unanswered for the most part. They also note that most managers don’t understand how each of these operational resources individually affect quality, price and (reliable, on-time) delivery – the dimensions that matter to the organization’s customers. I have to agree here as well. I also think that until the right optimization & simulation based tools to understand the tradeoffs are acquired by an organization, the situation is not likely to change.

Diving in, capacity is defined as machine capacity, labor capacity, and the physical space required to achieve a desired level of output within a desired period of time. It’s something that every business measures and controls, but few appropriately take the notion of demand “uncertainty” into consideration when planning and fewer still look at capacity in conjunction with inventory requirements and inbound/outbound order-to-delivery lead times. Volatility of demand and order-to-delivery lead time need to be an integral part of the overall resource planning exercise. This is the only way that an organization will be able to accurately determine where capacity should be located, what form it needs to take, and what levels need to be available.

Inventory is defined as the number of finished goods on hand as well as the number of unfinished goods and raw-materials on hand required to produce the finished goods. A high level of finished goods inventory (theoretically) allows for shorter order-to-delivery cycles and better customer service, but can come at a high cost. A low level of raw materials inventory can lead to significant idling of capacity or long lead times when demand suddenly spikes.

Lead time is defined as the amount of time it takes to get new raw materials into the processing plants and get finished goods from the plants or warehouses to the end customer. When not well understood, procurement may grant excessive lead times for piece-price reductions that cost the company more than it saves or finance may require unreasonably low levels of inventory that have the same negative effect when demand spikes.

The authors than include a nice chart that categorizes key trends, their drivers, and the resulting impact on critical operational resources.

Trend Drivers Capacity Impact Inventory Impact Lead Time Impact
Globalization new market emergence & low-cost labor locations more capacity required more transit stock and finished goods inventory longer and more variable lead times
Extended Enterprise technological and functional focus on “core” less capacity required more transit stock and finished goods inventory longer and more variable lead times
Product Complexity niche market, product localization, & shorter life cycles more capacity required more finished goods and raw material inventory longer and more variable lead times
Capacity Consolidation fixed and variable cost reduction, market share, new markets less capacity required less finished goods and raw material inventory longer lead times

Finally, it finishes off with some recommendations of the solutions that companies should employ to come to grips with these problems, which include:

  • Develop Buffers to Improve On-Time Delivery Performance
    Capacity and lead time can also be buffered like inventory. For example, telecommunications and computing always reserve redundant capacity and companies can pad lead time requirements for non-critical or non-fad goods.
  • Make Differentiated Customer Service Strategies a Reality
    Understand what each customer segment values in terms of cost, quality, features, and delivery performance. Don’t promise more than is necessary up-front, leaving room for buffers if needed, and balance inventory, capacity, and lead time to meet each customer need even in extreme situations.