Monthly Archives: April 2008

Speed Up Your Physical & Financial Supply Chain Integration – Use a Consultant

Inside Supply Management recently ran a surprisingly good article called Strengthen Your Financial Supply Chain that outlined the importance of a tightly integrated physical and financial supply chain. Although there wasn’t much that I haven’t already told you in my Finance posts and in the Supply Chain Finance Primer, it had an interesting case study about Sunfor and how it tackled the problem of unbalanced cash flows that was jeopardizing its manufacturing flows.

According to the case study, the primary reason that Sunfor had unbalanced cash-flows that were jeopardizing its manufacturing flow was slow payments – the age-old bane of suppliers in countries where credit is hard to come by and / or burdened with excessive interest rates. To address its problem, it started working with Xalles, an international business management consulting firm (with offices in the U.S., Canada, Ireland, Brazil, and Ghana as well as personnel on 5 continents) that specialize in the financial supply chain process life-cycle. Xalles helped the organization break into the government of Singapore, which is a credit-worthy client. Orders secured from the government can be presented to their bank, which is much more willing to finance orders from a local government than from an unknown business half-way around the world. The financing allows Sunfor to maintain steady production while waiting for the inevitable slow payments from its global customers.

Of course, this is just one of many ways you can improve your financial supply chain. The question of where to start is a difficult one, and precisely the area where you should consider bringing in outside help to guide you down the road. Xalles financial supply-chain process life-cycle covers demand management, strategic sourcing, contract management, supply management, order management, logistics management, receipt management, payment management, accounting, compliance, and data management. Furthermore, as per the Global Trade wiki-paper, both the import cycle and export cycle typically consist of 14 steps. This makes the question of where to start dizzying for a novice attacking her financial supply chain for the first time.

As the article points out, an experienced consultant will be able to quickly focus on your most significant problems that will yield a significant improvement when addressed. As the article notes it might be as simple as instituting basic process re-engineering with the proper people to implement a “people solution” quickly without having to build or integrate entirely new systems or it could mean a $50,000 automation solution using simple repository tools that allow users to access paper-based information through the web. A consultant will be able to help you break down the overall project into a series of mini-projects, each with its own business case, to help you identify the right time to pull the trigger on each step.

So if you think you’re inefficient on the financial side, and if you haven’t addressed your financial supply chain, you can bet that you are, a good place to start is to call in an expert consultant who will analyze your processes and systems, identify the inefficiencies and how much they are likely costing you, and layout a roadmap for moving forward. It’s better than standing still. Especially when consultants are cheap.

Talent is the Key to Post M&A Success

Late last year, Chief Executive ran a great article entitled Stars and Keepers that noted that about half of all mergers and acquisitions fail to deliver value. Although the usual suspects of poor synergy and incompatible cultures are usually blamed, much of the blame should be placed on lack of an appropriate talent identification and requisition strategy.

As the article points out, the real expertise about innovative products, services or processes tends to be carried around by employees in their heads and unlike an assembly line, such employees are portable. They can walk out the door and never return, especially if they’ve already sent their resumes, which is likely since most people get nervous when M&A discussions are in the air and start looking for new work, in case they are the ones to get the shaft. And once talent is gone, it can’t be called back. And if enough talent leaves, there goes the value you spent so many millions of dollars on acquiring. The merger is considered a failure.

Before you start M&A activity, it’s important not only to have an integration strategy, but a specific strategy for talent retention. One framework for creating a talent retention strategy is outlined in the referenced article. It starts with the creation of a simple 2*2 grid for sorting employees in the merged company along the axes of “criticality” and “future fit”. This allows you to segment employees into transition, integration keys, keepers, and long-term stars.

  • Transition
    Even if these employees are star performers, they won’t be needed because they fill redundant support roles. A plan will be needed to assist them in finding a new job and transitioning out of their current role.
  • Integration Keys
    Although they have the critical skills required for the transition, these employees don’t have a long-term future in the organization. The plan will have to include offers with appropriate incentives that will entice them to stay on during the integration, as well as a plan for helping them transition out of the organization after the integration is complete.
  • Keepers
    Although these strong performers are not yet stars, they have the potential to be stars in the future. The talent retention plan will have to include a communication strategy to convince them to stick around, outlining their potential role in the company of the future.
  • Long-Term Stars
    These are the people central to the synergies identified as key to a successful M&A transaction. They are the ones that possess the unique skills or intellectual capital required to continue to grow the business. It’s critical that the plan not only includes an outline of their future role in the company, but a personalized communication plan and offer for each star that you want to retain. Because if they leave, the M&A will be a failure.

After you’ve identified the stars and keepers, the next thing to do is flush out the plan. The article provides the following outline, which is a good start:

  • Flesh out the retention plan and stick to it
    Don’t say one thing and do another. All employees have to trust you.
  • Focus on best-of-breed, not just home-grown talent
    The goal is to protect the value of the merger, not to favor existing employees.
  • Adapt the offers to the employees
    Every employee is unique. Don’t take a one-size-fits-all approach.
  • Communicate early and often
    People get very, very nervous through a merger. Be sure to quell their fears on a daily basis.

CVM: Not Just About Supplier Diversity Anymore!

CVM Solutions, one of Spend Matters’ Nine Vendors to Watch in 2008, appears to be on a quest these days to conquer the sourcing space, with their intent to offer supplier data enrichment, supplier relationship management (SRM), spend analysis, and a soon-to-be-launched procure-to-pay process management solution. According to Jason, CVM is a “best-kept secret” because of their extensive data enrichment services, supplier portal, and their new uber-workflow and process management engine that creates a level of control and visibility that he’s not seen elsewhere.

Now, I don’t know if they’re the “best-kept” secret, but when it comes to their data management capabilities and their new process management engine, they’re certainly a well-kept secret. Their extensive data management solution allows you to track extensible & customizable information on each supplier of a generic, location-based, contact-based, business registration, financial, capability, diversity, contract, sourcing, SRM, administration, and documentary nature – including scanned attachments which can be easily uploaded by specifying meta-data, printing off a cover-page with a system-generated bar-code, and faxing the document (with a cover-page) to a CVM provided fax number. (Reducing the number of steps in the traditional scan, convert, upload, tag, index.) In other words, their data management capabilities are in the same class as Aravo, a vendor I’ve written about before. However, due to their extensive supplier information databases (as the largest provider of diversity information in the US with enrichment data being culled from over 330 external databases and over half of the Fortune 500 as customers), they can also quickly and easily enrich your data, eliminating the need to integrate a third party’s data stream into your supplier data management / supplier information management solution (SIM), which might reduce the Total Cost of Ownership for a company that needs extensive amounts of third party data (as long as their pricing for enrichment services remains competitive with Austin Tetra and D&B.

For an initial release, I was also quite impressed by their new procure-to-pay process management engine. Although it’s not competitive with either your best-of-breed e-Procurement suites or your best-of-breed e-Sourcing suites when it comes to procurement and sourcing capabilities, with proper use, its flexible design allows you to accurately track all of your ongoing projects, and their current status, with respect to each supplier and each category and manage the process which, for most companies, probably involves at least three or four different systems (spend analysis, e-Negotiation, contract management, e-Procurement, e-Payment, order management, etc.). For example, their default assessment / supplier selection / contract draft / contract approval / transition workflow allows a category manager to document where each sourcing project is, and, when a supplier is selected, track where the project is with respect to contract drafting, approvals, and issuance. This information is then integrated with the data repository, where you can define alerts to notify you when certain quotas are reached / not reached in a time period and when a contract is about to expire. Steps can be added to, or removed from, the workflow, as required by your organization, and it allows you to continue using a collection of best-of-breed products from multiple vendors but still track your project status in one-location (which I believe is critical because there isn’t a single suite vendor with more than 3 solutions that is Best of Breed in everything – and when a best-of-breed solution can squeak out even 2% to 3% more on 100M+ spends, in today’s economy, I don’t think you can justify not going with a BoB solution).

I was also impressed by the usability of the application from a buyer’s perspective and a supplier’s perspective – which is important when you want to capture tier 2 diversity information from your suppliers in addition to asking them to use the tool to enter and maintain their basic information. The only thing I didn’t like was the response time – many screens took an average of 3 to 4 seconds to load in the demo (and I’m not willing to blame the internet as I have high speed cable on a 15MB rated network and can sustain 1MB/sec download times on my machine with ease). If you’re going to be maintaining large databases, you’ll need to ask about their SLAs and insure that you have enough processing power and bandwidth dedicated to the application. (Fortunately, with today’s hardware prices, you can do that at very affordable prices!)

I was, as regular readers might guess, not impressed with their “spend analysis”, or, more appropriately, with their classification of their spend reporting program as “spend analysis”. It’s a good reporting package with over 30 pre-configured reports that has all of the day to day reports that managers and accounting and tactical purchasers are going to need … but when it comes to the true analysis capability required by your power buyers, it’s just not there. In other words, like many of the spend analysis applications on the market, it will satisfy all of the requirements of management and your tactical purchasing team, but none of the requirements of your power buyers. However, it is seamlessly integrated with their platform, so if you were willing to augment it with a stand-alone power tool for your power buyers (like BIQ), it would allow them to focus on true analysis and not have to worry about meeting the reporting requirements of management or the tactical buyers AND allow those individuals to quickly and easily access spending reports augmented with supplier information, diversity data, and standard classification systems such as NAICS and SIC. Plus, if you maintain complete contract pricing information (which is quite easy to do in their solution for commodities), it can automatically generate “offender” reports for accounts payable when you’re over-billed or accounts receivable when you reach the discount volume. So, if you can get a good deal on it, the “spend reporting” solution could be worth the price when you calculate the opportunity cost of a power user of a companion BoB application generating standard reports for management and accounting vs. digging for new opportunities. Plus, and this could be a key selling point for them, they have an add-on Federal Reporting Module that can be configured to automate Federal and State Agency reporting down to the contract level – and anyone who has had to prepare these reports knows how time-consuming they can be.

Finally, they’re also getting into Risk Assessment Reporting, which, after some of the recent supply chain disasters we’ve seen in recent years, is likely soon to be a must for larger corporations. When it comes to talking-the-talk, they’re certainly ahead of much of their competition in understanding “risk” and the importance of measuring it, planning for it, and proactively dealing with it. When it comes to walking-the-walk, their reports appear to be more-or-less comparable to their competition, especially since they can pull in D&B risk scores and supporting data. However, these days, I don’t think a financially based risk-assessment tells the whole story. I think they need to integrate more sources of information, especially for small businesses (like Austin Tetra is doing), to arrive at a more complete risk picture. It’s good for a first offering, but I’d like to see how it improves over the next year before locking in any long-term agreements. This is an emerging market in the sourcing services sector, and I’m not sure if anyone really has a good lock on what the right solution is.

In summary, I think they are a well-kept secret when it comes to supplier data management and, now, sourcing and procurement workflow management, I definitely think they have a lot of potential on the SRM/SPM side and the risk side as well, and even though they don’t have true “spend analysis” (just like the vast majority of vendors who make the claim), I think that their “spend reporting”, and their federal reporting module in particular, is quite good from a usability perspective, especially for non-technical management, accounting, and tactical buyers. They’re definitely a company to look at and keep an eye on, but like other extensive suite providers, they’re not best-of-breed in everything (no matter how good the “eye-candy” UI looks).

Maximum Results Come From Supply-Based Spend Management

Chief Executive recently ran an excellent article by Drew Morris on Leading Your Business to Maximum Results that noted that the best way to boost results is to first identify the best ways to boost results, and then to go and do them. It described the methodology of Insight-Based Management that takes the standpoint that a company that wants do do well should first identify the performance the owners and influential analysts expect, and then work towards achieving that goal. For a private company, this means sitting down with the owners and investors and having an open and honest dialogue. However, for a public company, it can be a bit trickier. A public company needs to analyze it’s stock price to figure out whether adding another percentage point to the revenue-growth rate is more valuable than another point of profit margin. According to the article, the answer is in RVG – Relative Value of Growth, which is determined by the following formula:

Increase in EV due to 1% higher revenue growth rate

Increase in EV due to 1% increase in operating profitablity

Once a business knows it’s RVG, it then has to identify potential actions that will increase RVG. Potential actions include:

  • Price optimization
  • Improved product/service design
  • A better marketing message
  • Cost cutting
  • Leverage of technological progress
  • A killer customer experience
  • High-value business models

All of these actions have one thing in common: supply-based spend management. Even though cost-cutting might be the only action entirely under the control of supply-based spend management, each of these actions is critically dependent on supply-based spend management for successful execution. You can’t have a killer-customer experience if you don’t get the product/service to the customer, and do so at the right place and right time. The supply chain organization is in the best position to leverage technological progress and help improve product/service design. Being able to meet an optimal price-point in a target market will depend on spend management being able to keep costs down enough to meet the target price, and a well-run supply chain organization is a high-value business model in itself, as well as a basis for a better marketing message.

Of course the key is to determine the best actions, or those that will give you the best results. This requires calculating the revenue and profit gains that will result from each potential action, based on the profit power values for a company (which define the % profit increase due to a 1% change in the primary profit drivers), as well as the up-front costs. Then the profit associated with each potential action can be compared and the best actions taken.

Since RVG is hard to calculate for a private-company, and thus hard to manage by, and since wealth creation will improve RVG, these actions can also be compared using EM – Economic Margin, a wealth creation metric that

  • allows wealth creation by an action to be accurately gauged
  • is easy for the “numbers people” to understand and calculate
  • makes intuitive sense
  • allows for comparisons
  • is applicable at all levels of a company
  • is equally suitable for public and private companies

It is calculated using the following formula:

Cash Flow from Operations – Cost of Capital

Invested Capital
= EM

Furthermore, whereas RVG-based calculations tend to maximize the RVG-weighted profit and revenue growth of a company’s existing portfolio of businesses (where each could be based on a specific product or service offering), EM easily allows for changes in the portfolio to be considered.

Although the article is quite lengthy (about 15 pages), it’s a very good read and a must for any supply chain manager who wants to understand how the senior finance people determine which business unit’s proposal is the most valuable one to the business and, thus, which proposal they should allocate funds to. Being able to back up your proposals with these calculations relative to other actions the business can take will put a lot of weight behind your proposal and possibly smooth the way to getting that budget for a new system, warehouse, or team member approved faster.

Spend Analysis Meme Busting, Part I

Today’s post is courtesy of Eric Strovink of BIQ. (It is also a good summary of some of the more critical assumptions that were wrong in the book I reviewed last Friday in this post.) 

The following memes are circulating through the space.  Needless to say, they are all very false!

1. Vendor classification by spend is the secret sauce.
For direct materials, the key is said to be automatic UNSPSC classification. For indirect materials, the key is said to be D&B-style “who owns whom” plus SIC code. This ignores the fact that who owns whom is often irrelevant (Hilton hotels, for example, are all franchise-owned), and that many large vendors sell multiple, disparate products and services, so vendor mapping by itself is often ineffective.

2. Direct linkage to existing accounting systems or e-commerce trading platforms is the “holy grail”.
The logic is that the transactions from the e-commerce platform or ERP system should feed the spend analysis system transparently and directly. The confusion here is between “business intelligence” and “spend analysis,” a distinction that is often incorrectly blurred. To do its job properly, a spend analysis system must re-cast and re-map transactions into a useful form, often in a very different manner for each individual analysis, not just report blindly on fixed input data. A direct linkage to accounting is therefore a bad idea.

3. Spend analysis means the propagation of spend data to a large audience via a data warehouse.
This is the idea that a shared data warehouse is a “spend analysis” system, when in fact no useful analysis can be done without alteration of the schema (something that is impossible in the data warehouse model).

4. Conventional relational reporting tools are useful on spend datasets.
In fact, reporting on spend data can’t be relational, because only OLAP queries will function reasonably on large spend data sets. And, conventional reporting isn’t useful, because useful analyses always involve modeling and data outside the scope of the spend analysis system.

5. Spend analysis is only useful within the context of an e-sourcing suite.
This is a fallacy promoted by suite vendors. Armed with good visibility into spend, any procurement department can improve performance dramatically without a multi-million dollar commitment to an e-sourcing suite. Furthermore, the actual proportion of spend actually traveling through the suite is typically less than 20% of total spend. Thus, “integration” with a minority of the spend is a step backward, not a step forward.

6. “Point” or “best of breed” solutions should be avoided; rather, they should be part of an ERP system or e-sourcing suite. This might be true if the point solution is expensive or complex to implement. It is not true if the solution is inexpensive and easy to use. This is especially true given that suite vendors promote warehouse solutions that offer little or no analytical capability. In that case, the point solution can add significant capability that is lacking.

7. Vendor familying and spend mapping is difficult and/or requires special technology and tools.
This is a marketing myth, used by spend analysis vendors to aggrandize their own tools and/or expertise. Procurement professionals and sourcing consultants are far better at classifying spend than the “10 guys in Bangalore” behind most vendors’ claims. The familying/mapping process can be accomplished easily and quickly in most cases, even on large datasets.

8. It’s critically important to get spend mapping “right” the first time.
Wrong. No spend map survives first contact with a procurement professional who knows his commodities well. The best strategy is to empower that procurement professional to correct errors as he finds them, quickly, easily, and with real-time results. Nothing else will satisfy him.

In summary:

1. The “secret sauce” is being able to build the cubes you need.

2. There is no “holy grail” of integration.

3. Spend Analysis and Data Warehouse technologies are two completely different things.

4. Spend Analysis and Spend Reporting are two completely different things.

5. Spend Analysis can be done on its own and does not need to be part of a sourcing suite. 

6. Best-of-Breed solutions are just fine for spend analysis.  

7. Spend Mapping is easy.  The real secret sauce is “map the GL-codes, map the vendors, map the GL-code and vendor combinations for vendors who supply more than one GL-code”.  This gets you at least 90% and can be done by an accounts payable clerk in a day in most organizations with a proper solution that supports rules-based mapping and rule (group) priorities.

8. No one gets spend mapping “right” the first time, so there should be no assumption of such.  That’s why a real spend analysis solution where you can continue to build cubes and throw them away until you’re happy is critical.