Monthly Archives: September 2008

Eric Strovink of BIQ: Why I’m Sponsoring SI

Today’s guest post is from Eric Strovink, CEO of BIQ. I asked him if he’d be willing to share why he chose to sponsor Sourcing Innovation (SI), knowing that BIQ, as a small company with a limited marketing budget, has not done very much in the way of advertising in the past.

It’s very simple: I know that BIQ users read and respect Sourcing Innovation, because they tell me so. Our customers and prospects are among the best-informed and most demanding sourcing professionals in the world, and they have no patience for blog posts that provide zero useful information, or just paraphrase the latest corporate press releases. They are looking for information, insight, and education, and they find it here.

Michael Lamoureux is unique in the blogging space — he has a PhD in Computer Science, and he’s a leading thinker on the application of optimization theory to supply chain. He’s not pretending to be an expert on procurement technology — he’s the real deal. That means he’s not fooled by a glitzy new user interface, or a tired old application dressed up in a Marketing tu-tu, or a functionality claim that can’t possibly be true. Even if you don’t agree with Michael’s point of view on a particular subject — Michael and I have many debates whenever he’s in town — you can’t ignore the tasty mix of information and commentary you’ll find on SI. You can also be sure that Michael will post opposing points of view, and conduct a vigorous and informative dialog.

One of the big problems getting to the facts in our space is that a lot of folks tiptoe around the major vendors and the big ERP players — and why shouldn’t they, that’s where most of the marketing money (and therefore their pay check, directly or indirectly) comes from. The major analyst firms (for structural reasons) can’t even consider small vendors in their “quadrants” and “waves,” so it’s very hard for an end user to get a good reading on what’s new and what’s really available. For example, here’s a simple question: Is it possible to go with innovative solutions — and do enormously better on a price-performance basis — rather than simply choosing whoever ends up at the forefront of the “wave” or at the upper-rightmost corner of the “quadrant?” You’ll find some good answers on these pages.

Back in the 1980’s the question when buying a PC was, “Why not IBM?” Funny how the tables turned in the end — “buying IBM” turned into an expensive mistake for procurement organizations that committed to the heavily-marketed and ill-considered PS/2. The “safe” decision was precisely the wrong decision, as it so often is. Instead of paying lip-service to vendor marketing spin, SI proposes real questions that we should ask about procurement strategy, and then answers them with passion and commitment.

SI is the place to go when you need hard information on breakthrough companies like Vinimaya,  Co-eXprise, Coupa, and Trade Extensions. SI is where you’ll be pointed by almost any Google search on our space, because SI maintains over 950 high-content posts online. Michael Lamoureux is a major author of the e-Sourcing Wiki, (co-author and) editor of the e-Sourcing Handbook, and a prolific guest commentator on several other blogs.

So these are some of the many reasons why BIQ is a Sourcing Innovation sponsor. I invite other innovative vendors to join us in supporting SI.

Eric can be reached at strovink <at> busiq <dot> com.

the doctor’s Seven Grand Challenges for Supply & Spend Management

Seven deadly sins
Seven ways to win
Seven holy paths to hell
And your trip begins

Seven downward slopes
Seven bloodied hopes
Seven are your burning fires
Seven your desires….
  Adrian Smith / Bruce Dickinson

In my last post, which announced the cross-blog series that this post is officially kicking off, I reviewed the seven grand challenges for IT over the next twenty-five years, as laid out by Gartner back in the spring. Although they ranged from the ridiculous to the sublime, and contained a fair amount of overlap when closely analyzed, it’s a worthwhile exercise to undertake every now and again, because in order to develop a useful solution, you need to identify what is needed and the path you should be on.

This inspired me to propose a set of “seven grand challenges” for supply and spend management, in the hopes that it would get you, dear reader, to think about what is important, what problems should be solved, and where we should go. Considering how important supply management is in these troubled times, I hope that all of my fellow bloggers chime in with their ideas on what’s good, what’s bad, and, what’s downright ugly in supply chain today — because the first step in solving a problem is properly identifying it.

So, without further ado, to kick off this cross-blog series, here are the doctor‘s proposals for the seven grand supply and spend management challenges:

  • Optimization
    There are a number of challenges here. The first challenge is getting people to use solutions that are already out there. There are currently a number of offerings that address strategic sourcing decision optimization, distribution network optimization, and freight optimization quite well, and that, when properly applied, can save the average company up to 12% above and beyond the best solution obtained with auctions. The second challenge is integrating the different problems (sourcing optimization, freight optimization, network optimization, etc.) into a common framework that allows the tradeoff effects of each decision to be adequately modeled and understood in the big picture. The third problem is addressing the emerging non-quantitative regulatory and compliance requirements such as RoHS, WEEE, and GHG emission limits in a consistent and value-oriented manner within the optimization model.
  • Supplier Enablement
    This is something we still don’t have a good handle on. Beyond “supplier enablement is the provision of technology based solutions that enable the supplier to be more productive and better serve the buyer”, there isn’t yet a general consensus of what this technology needs to be, as most companies have not yet embraced B2B 3.0. I’ve argued before that, today, it’s a combination of catalogs, networks, e-Document exchange and management, and supplier portal technology, and I still think that is a good start, but enablement should go beyond enabling the exchange of information, it should improve the supplier’s operations overall.
  • Integration of the Physical, Information, & Financial Chains
    For most companies, these are three different chains. Some companies that have embraced RFID, GPS, and e-document management have taken the first steps to integrating the physical and information flows, but the technology is still emerging, the integration isn’t smooth without extensive integration and customization between a number of different solutions (and only Fortune 500 companies can even afford to consider this), and we have only started to look at the financial supply chain and how to best integrate it with the information supply chain. I think it will be a while before solutions that truly support a holistic view will emerge, especially considering that even the gorillas in the space don’t have end-to-end sourcing and procurement.
  • Solution Globalization
    Let’s face it … supply chains today are truly global, but the solutions are not. Most “internationalized” solutions are only available in a smattering of languages, most “internationalized” solutions are not plugged into real-time currency exchange feeds — and few developers have thought about the need to maintain/display multiple conversions (including the rate at the time of purchase, the projected rate, the current rate, etc.), and most “internationalized” solutions don’t help you understand how to do business with the country of interest.
  • GHG Tracking and Reduction
    Most enlightened countries have woken up to the fact that, even though we don’t know precisely how damaging each ton of GHG and / or carbon we emit is, we do know that it’s damaging and that we have to reduce our emissions. The first step is to get a baseline of the emissions produced by your operations, but for many companies, this is a multi-year effort. Better product and service solutions are needed. Also, although there are multiple proposals on the table to reduce emissions, there are few total value management models out there to help us select the right ones.
  • Risk Prevention
    Not only is risk not going away, but it’s getting worse by the year. Supply chains are getting more complex by the year, and the likelihood of something going wrong is steadily increasing. Solutions that can help a company identify risks, in real time, and identify possible mitigations and actions required to implement them, are desperately needed.
  • Opportunity Analysis
    Costs are skyrocketing, but consumer discretionary spending is stagnant at best. They key to a successful supply chain is cost reduction and avoidance, and this requires continual opportunity analysis. I envision this starting with modern spend analysis, but it needs to go beyond true spend analysis to continual innovation, since the greatest cost reductions will come from true revolutions, and not just the shrewd identification of category-based overspending. I envision that this will start with the integration of PLM with Life Cycle Analysis and Next Generation Analytics and then morph into something that none of us can envision today.

Now, I realize that these are pretty much the same problems we have been facing for the last five to ten years, but I suspect that it will be quite a while before they are solved due to the overwhelming complexity of today’s supply chains.

When the series is done, I’ll compile the “master list” of challenges and, if any of my fellow bloggers can convince me there are bigger challenges out there, revise my list.

A Chief Executive’s Advice for Performance Improvement

In Turnaround Time: Ways to Jump Out of a Slump, Mark Gottfredson and Steve Schaubert wrote a remarkably perceptive article that outlined a clear and simple process for navigating your way out of a downturn:

  1. Diagnose the “Point of Departure”, or where your business went wrong
  2. Identify the “Point of Arrival”, or where your business needs to be at the end of a period of time to be successful again
  3. Define a small number of key initiatives that will sequentially get you from the “point of departure” to the “point of arrival”

Ok, maybe it’s not so simple as many business have a hard time identifying, at least internally, where they went wrong, have a harder time figuring out what will make them successful, and often have the hardest time of all identifying that sequence of innovative initiatives that will take them from here to there. However, the article does note that when businesses start to fail for performance reasons, the vast majority of the time it is because they violate one of the following four fundamental laws that, despite not being built on an economic theory, do capture, in an almost eery way, some fundamental truths of business:

  • Costs and Prices ALWAYS Decline
    It is a basic law that inflation-adjusted costs and prices in nearly every competitive industry decline over time. Raw material costs going up? Then you have to find an innovative method of production to keep costs done, or a way to make the product from an alternative, cheaper, material, or a way to make a higher quality product that carries more (perceived) intrinsic value. (Successful cell phone manufacturers live and die by the latter.)
  • Competitive Position Determines Your Options
    Leaders are always in a good position to gain more market share through investment or to raise industry standards in quality, service, and innovation. Followers are stuck with doing their best to keep up until they hit upon an aggressive innovation strategy that can move them into a leadership position.
  • Customers and Profit Pools DON’T Stand Still
    The desires of your customers will change over time, as will the amount of disposable income they have. You need to know what your most profitable customer segment is and meet their needs.
  • Simplicity gets Results
    In addition to simplifying your processes, you must also simplify your strategy, organization, breadth of product line, and, most important, usability. Apple understands this well.

The authors also give you a good working definition of “point of arrival”. Specifically, it means a set of defined, numerically specific goals that can be accomplished in just two or three years. In other words, don’t shoot for the moon if you haven’t even successfully launched a rocket into space yet. Although the goals should be bold and compelling, they must be realistic. No amount of motivational speaking will get your employees behind something they know is fundamentally impossible.

Finally, they give you some advice on how to select the right initiatives to get you there. Specifically, select ones with measurable metrics that address the following characteristics of the four laws:

  • Law 1: Costs and Prices Always Decline
    • Cost/Price Experience Curve
    • Relative Cost Position
    • Product-Line Profitability
  • Law 2: Competitive Position Determines Your Options
    • ROA/RMS
    • Market Share Trends
    • Capability Assets and Gaps
  • Law 3: Customers and Profit Pools Don’t Stand Still
    • Customer Segments and Trends
    • Customer Loyalty
    • Profit Pool Migrations
  • Law 4: Simplicity Gets Results
    • Product & Service Complexity
    • Organizational & Decision Making Complexity
    • Process Complexity

Local Suppliers, Your Opportunity is Now!

The media is full of stories about the failings and weaknesses of global supply chains. It seems we have suddenly discovered that China is far away (and not in fact a remote US state); that ’emerging’ markets do not share Western value systems; that business rules and practices are driven by culture and cannot simply be overridden or suppressed; and that historic economic muscle does not automatically translate to limitless power and control.

So now the body of experience is growing. The war stories are proliferating. And as costs rise, supply constraints kick in, quality failures become visible and threatening, [and] we find [ourselves in] an environment in which fundamental questions are being asked over supply strategies. Perhaps local sourcing makes sense. Maybe those old suppliers were not so bad after all.

So states Tim Cummins in the beginning of his blog post on how Buyer Misery Equals Supplier Opportunity where he essentially states that the current market should offer the perfect storm for local suppliers to make their case that, when everything is factored in, local suppliers are often the best choice for your business.

As Tim notes, in tough times, local suppliers can offer the following advantages:

  • lead time reduction
    You can get products next week, not next quarter. This reduces your costs and increases your profits in multiple ways:
    • reduced transportation costs
      It costs less to truck across a few states then to truck across a few provinces in China, ocean freight across the entire ocean, and then truck across multiple states through multiple regional distribution centers.
    • reduced inventory costs
      You only have to store a few weeks worth of inventory, not a few months. Considering 10% to 20% of total product cost at most companies is inventory cost, this is very significant.
    • fewer lost sales from stock-outs
      If your inventory depletes faster than you expect, you can often get more in days with expedited shipping (which is worth it if the product is a high profit margin).
  • quality improvement
    In addition to sharing the same values, a supplier in your local market is bound by the same laws, regulations, and liabilities that you are. Thus, the chances of them producing an inferior quality product are much lower. Note that this also reduces your costs as higher quality means fewer returns, and, most importantly, fewer lawsuits!
  • compliance
    Again, a local supplier is bound by the same laws and regulations that you are. Thus, they will be compliant from the start. This also reduces your cost as compliance monitoring can get very costly.
  • innovation
    Even though some foreign suppliers, desperate for business, may seem over eager to work with you, you have to remember that, in some cultures, you don’t say ‘no’ to the customer and that the supplier may not be as open to open collaboration as a local counterpart who speaks your native language natively as well. Plus, a supplier in a local market is more likely to be going through ups and downs at the same time you go through ups and downs and is, thus, more likely to be on the same wavelength.

So follow Tim’s advice and get out there and promote your services as a more reliable, ethical, environmentally-conscious, compliant, quality, innovative supplier who is ready and willing to work with your customers to find new and innovative ways to reduce costs and increase value across the board in a manner that will allow a consistent and predictable supply.

And for all of you suppliers who are saying “How do we do this?, my answer is to use the tools and services that are already available to you. Create a great web-site and have a search engine optimization firm optimize it for Google searches. Every day, more and more people turn to the web, and Google, to help them discover new sources of supply. Then, identify a marketplace (not a supply network that is limited to buyers who use a certain vendor’s software) where people are going to go to look for suppliers like you. If you’re in manufacturing, I recommend taking a good look at MFG.com. Yes, it is a pay-to-play marketplace (but then again, they’re all pay-to-play marketplaces), but at least they have an in-house team dedicated to helping manufacturers make the most of their opportunity, which includes assistance in getting set-up, finding new opportunities, and responding to RFPs. (This is because they make most of their revenue off of transactions, which don’t happen unless their manufacturers get business.)

Want to Save? Get a Handle on Services Spending!

Earlier this year, Industry Week, in their article about how Services Supply Chain Management [is] an Untapped Opportunity, picked up on a recent study by CAPS that found that purchased services averaged 39% of total purchasing spending. That’s a significant number – especially when it’s getting harder and harder to save on goods when energy and raw material costs are still spiking across the board. And its a worrying one when you consider that not only do the majority of companies not have a good technology-based solution to help them make the right decision, but they often don’t even know how much they’re spending on services, if they’re being billed consistently – and in line with the local market, or even being billed according to the contracted rates!

In one of my recent posts, I noted how Iasta used their optimization-enabled e-Sourcing solution to save roughly 20M on two different projects, including a 20M savings on a services spend of roughly 80M. They didn’t do this because optimization is a magic technology that always saves you wads of money (it’s not, and what it does is find the lowest cost solution that is feasible within your constraints), they did this because the organization was simply signing national contracts with large multi-purpose consulting shops at what it thought were good rates, instead of signing regional contracts with regional providers who performed the required services at local rates and who could offer discounts for local volume-based awards. They built a sophisticated RFX bid model that allowed providers to bid by resource type by location, and to offer discounts based on total dollar award across resource types and / or regions, and then fed all of the data they collected into an optimization model that had the computational strength to identify that, lo-and-behold, breaking the contract up among multiple regional providers who could give the best price in the region could save you a significant wad of cash.

In another of my recent posts, I noted how expert spend analysis consultancies like Opera Solutions and Lexington Analytics can often walk into a client and get them a rebate cheque on overpayments, that are common in office supplies, electronics, and there should be no surprises here, services categories. They do this not because they are experts in guilt transference or debt-collection, but because they know how to normalize and structure your data in a way that allows them to compare it against contracted rates, find overpayments, and, also, find duplicate payments that your vendor forgot to tell you about. They then prepare a report that makes it abundantly obvious that your vendor was ripping you off (whether they meant to or not), which essentially forces your vendor to either refund you or give you a credit against future services (as you have everything you need to take legal action, which is something you’d both rather avoid).

These days, services at an average mid-size company could represent a multi-million savings opportunity and savings at a large company could represent a savings opportunity worth tens of millions of dollars. Although these numbers weren’t significant in the early days of e-Sourcing when supply outstripped demand in many categories, raw material costs were low, and e-Auctions were leveling the playing field, now that you’re lucky to contain cost increases on your purchased goods to inflation, these numbers are very important. Therefore, it’s important that you get a good handle on your services spending and exploit it for the savings opportunity that it is.

So how do you do that?

  1. Do a services spend analysis
    The first thing you need to do is get a handle on how much you are spending on each services category, and how many providers you’re using in each category per region, and, more importantly, roughly how much you’re overpaying and whether there are opportunities for refunds, rebates, or credits.
  2. Identify, and order, your biggest savings opportunities.
    Stop when you get to 10 or when you’ve covered 80% of your spend. You’ll attack these first.
  3. Break your savings opportunities into two groups: those you have the expertise to do in house and those that should be done with the assistance of an expert consultant
    The ones that can be done in house will be tasked to senior category experts in your sourcing group and the rest will be tasked to your CPO to find the right external expert to help your organization.
  4. Identify the right, niche, technology solutions to assist you.
    You get good results when you use good tools. For professional services, consider using a provider like Provade with a solution that specializes in work-force sourcing. For printing, consider a provider like Noosh that specializes in print services.
  5. Implement a good end-to-end e-Procurement solution with m-way matching that integrates purchase order creation, electronic invoice management, payables management, and contract management.
    This will insure that
    • when a purchase order is cut, it is cut with the contract rate included,
    • only invoices that bill against purchase orders at the approved contract rate, and for a number of hours/days within approved limits, are accepted,
    • the payment is for the amount, and only the amount, on the approved invoice, and that
    • your negotiated savings are realized!