Monthly Archives: April 2009

Do More With Less in Procurement

“Do More With Less” is the new mantra of businesses who are slashing budgets and, unwisely, slashing head counts. It’s a darned good thing it’s not a new mantra for procurement who has always been trying to “Get More From Less”, and do so with too few resources. That’s why I enjoyed a recent article in the Spring Edition of the CPO Agenda by Nick Martindale who outlined eight strategies being used by companies that really are “doing more with less”. These strategies, and others like them, will not only help you survive the downturn, but position your procurement department to be the organizational leader of tomorrow.

  1. Prioritize Workloads
    Understand where your finite resources will deliver the most bang for the buck and focus on those endeavors. Don’t oil the squeaky wheel … if it gets too loud, simply replace it. Focus on strategic sourcing projects and lean supply chain transformations that will reduce cost, improve efficiency, and take the waste out of your processes. That’s where the savings lie.
  2. Increase Productivity
    Eliminate redundant activities. Streamline sign-offs and processes. And, most importantly, don’t put off the acquisition of new systems. With pay-as-you go SaaS systems, you’ll save more than the small monthly fee you have to spend on them. Stop thinking about it. It’s a no-brainer decision.
  3. Refocus Strategic Initiatives
    Strategic initiatives are more important than ever, but the reality is that you can’t wait five years for payback, especially when there are strategic activities you can take now that start realizing payback next quarter. Start with those, and work your way up.
  4. Use Technology to its Fullest
    A real spend analysis system will allow you to slice and dice the data anyway you want, exposing opportunities you wouldn’t find otherwise. If you need to bring in an expert to do this, do so. Most consultants, who will work on a results-basis, can save you millions with these kinds of tools. Use them!
  5. Shoot the Mavericks
    Or at least prevent them from buying off of contract. Force all buys to go through an e-Procurement system that only allows orders against the contract without approval from a senior manager (for exceptional circumstances only).
  6. Reassess Spend Priorities
    Your best sourcing opportunities six months ago are not necessarily your best sourcing opportunities today. Every time you finish a project, reassess the next set of projects in the queue before you begin. There might be a new opportunity in the marketplace worth re-prioritizing your queue for.
  7. Use External Expertise
    You don’t know everything, and with a staff who can barely keep up with their increased workloads thanks to hiring freezes, you don’t have time to figure it out. Bringing in an expert will help you identify numerous opportunities that you’d otherwise miss.
  8. Outsource Non-Critical Activities
    Sometimes a third party really can do it better. And sometimes the quick-hit savings you’ll get from a GPO, while not necessarily the best possible, will be very significant to you, especially since you’ll get savings AND free up your staff to focus on core categories where they expertise will allow you to identify even more savings.

Supplier Relationship Management Best Practices

An article in the spring edition of the CPO Agenda addressed the issue of “SRM in turbulent times”. Noting that now is not the time to put efforts to develop stronger supplier relationships on the back burner, in addition to addressing the important issues of trust and being a good customer, it outlined some specific measures that you can take to improve your relationship.

As these measures were some of the best recommendations I’ve ever read in a traditional publication, I’m going to address them, and dive into the best ones.

  1. Accurate, Timely, Information (Exchange)
    There’s a reason they kept telling The Prisoner “We Need Information“. Simply put, you can’t effectively operate without it. And if you can’t effectively operate without it, how can you expect your suppliers to? Implement a web-based system that allows them to access what they need, when they need it. Insure that they get accurate, adequate performance metrics frequently, that design specifications for new products are complete and unambiguous, and that you provide them with realistic volume estimates for pricing new business.
  2. Realistic Cost Reduction Targets
    It’s okay to have stretch goals, but 20% cost reduction when commodities, energy costs, and labor costs are rising across the board may not be realistic. Work with the supplier to understand the process, the savings opportunities, and then set realistic targets. Also implement a program that shares the savings between you and your supplier in an equitable manner.
  3. Cost Avoidance Proposals Are Just As Good As Cost Reduction
    If your supplier comes up with a new process to produce the product that takes out certain production costs, or a new design that allows for cheaper materials to be used (without affecting performance or quality), that qualifies as a cost reduction.
  4. Provide Them With Lean Experts
    This will help both of you find ways to take waste, and cost, out of the system and demonstrate that you are committed to their success as well as yours.
  5. Provide The Supplier with Free Training
    Once you identify where they need improvement, give them the training they need to improve.
  6. Make It Clear That The Best Suppliers Get the Business
    This will reinforce the message that improvement will result in more business, and more profit.
  7. Align Purchasing And Engineering Expectations
    Nothing risks a good relationship more than forcing a supplier to be a referee when there are internal conflicts in your company when it comes to requirements.
  8. Fairly Compensate Suppliers When You Don’t Meet Your End of the Agreement
    If you cancel a program, fail to meet expectations, or change the requirements, don’t try to weasel out of your end of the agreement and force the supplier to bear the brunt of sunk costs. Pay for your mistake, or award them the new contract with an increased profit margin to allow them to make up their losses.

A Simple Guide to Improving (Procurement) Organizational Efficiency

Recently, the CPO Agenda published a simple guide on how to “improve organizational efficiency” that is worth a quick review, as an efficient organization is one that expends minimal time, resources, and cash on any specific activity. According to the article, it’s a simple 5-step process:

  • Review Processes
    Review all of your processes and their associated workflows for inefficiency, and eliminate it. You shouldn’t need multiple systems to accomplish one task (and if you currently do, chances are you can eliminate one or replace multiple systems with a new, lower-cost, SaaS offering).
  • Reassess Tasks
    Eliminate any task that doesn’t have value (unless it’s necessary from a regulatory, compliance, safety, or quality viewpoint). Reviewing all invoices manually? Implement a modern e-Procurement system that automatically compares invoices to POs and POs to contracts and only presents exceptions for manual review.
  • Remove Unnecessary Layers
    Three approvals for a $75 toner cartridge? Get real. Establish budgets and budgetary controls in the mandatory e-Procurement software and only require additional approvals if reasonable spending thresholds are met.
  • Collaborate Cross-Functionally
    Make sure process and system improvements make everyone’s job easier. If you can consolidate tasks across departments, you can get additional efficiency gains.
  • Drive Extra Savings
    Once your processes are streamlined, your unnecessary approval and management layers removed, and extraneous tasks abolished, you have more time to focus on strategic cost savings initiatives. Be sure to bring in experts to help you with this.

Tired of Yo-Yo Contracts? Fix the Price with an Indexed-Based Model

When markets yo-yo, so do buyers and sellers … and they waste time, and money, doing so. When prices fall, buyers scramble to cut new contracts to obtain better prices and mythical “savings”*. When prices rise, suppliers scramble to exit contracts to get better prices from other buyers. And when prices yo-yo, it’s a never-ending renegotiation dance that does nothing but waste time, and money, especially when there’s an easy way to lock in a contract for the long term that allows both parties to win. It’s called the Price Index(ed) Contract, and in this post I’ll explain how you can lock in a contract that will protect both parties and allow you to avoid the renegotiation dance … which will allow you to focus on more categories and new, and better, cost savings opportunities.

The first thing to do is to build a should-cost model that captures all of the major price components (> 5%, if not > 10%) using current prices, drawn from an index. We’ll use a (hypothetical but representative) cost breakdown for a 30kVA power transformer, since we all need power, as the foundation for our example.

 

Cost Amount Percentage
Steel 1055 34%
Labor&Overhead 620 20%
Misc 560 18%
Copper 530 17%
Oil 215 7%
Transportation 125 4%
3105 100%

 

This tells us that our primary cost components are steel, labor, and copper and that oil would have to to fluctuate 5% to have the same impact as a 2% fluctuation in copper and 10% to have the same impact as a 2% fluctuation in steel. This also says that if our threshold for negotiating a contract is a minimum cost reduction of 5%, that oil would have to fluctuate 70% for us to even consider a renegotiation. Given that rampant runs, like the one which we just experienced where oil tripled and fell back to the baseline in less than two years, historically only happen every few decades, and that labor costs tend to increase rather predictably with inflation, it also tells us that we should only be concerned with steel and copper costs.

There are market based indices for both steel and copper, the CRU is one example of the former and the New York Futures Market is one example of the latter. At least one of them will, on average, correlate to the prices that your supplier consistently plays for steel just like at least one of them will, on average, correlate to the prices that your supplier consistently pays for copper (which depend on their contracts, leverage, and the market(s) they buy from). You just have to agree on one.

Then, you can tie your contracts to the index and word them to automatically adjust prices on a monthly (or quarterly) basis using the impact of market price fluctuations on the should cost model. Since steel accounts for roughly 34% of the cost, if you agree to cost a increase of 1% for every 3% increase in steel cost, you won’t have to worry about your supplier having to choose between reneging on your contract or financial ruin in a bull market and if your supplier agrees to a cost decrease of 1% for every 3% reduction in steel cost, he won’t have to worry about you having to choose between finding cheaper sources of supply or risking financial ruin due to your inability to compete with (unrealistically) high costs. Similarly, if you agree to a cost increase of 1% for every 6% increase in copper price and your supplier agrees to a cost decrease of 1% for every 6% decrease, neither party loses — and more importantly, both parties win. In bull markets, your supplier gets to pass on the raw material cost increase — and only the raw material cost increase (as you both know the cost, no ridiculous mark-ups), and in down markets, you reap the savings without having to go through a long, time-consuming, wasteful renegotiation.

This works for any category you can think of, allowing you to lock in 1, 2, 3, and even 5 year contracts (on non-strategic categories) without having to worry about lost opportunities or overpayments. The only thing you have to do is check the indexes once a month (or quarter) on the date you both agree to “reset” the prices for the next month (or quarter) to make sure your supplier is holding up their end of the bargain. And you can even use this model to take into account financial costs, such as foreign exchange rate assumptions (if raw materials or components are being bought in a foreign currency) or finance assumptions (if part of the product or transportation cost needs to be financed). So build a should cost model and get that yo-yo off your finger.

* There’s no such thing as “savings”. “Savings” is just money you shouldn’t have spent in the first place. (And that is why “cost avoidance” is more important than “cost reduction”, despite the refusal of many old-school diehards to recognize that fact.

Information Technology Cost Management

Supply & Demand Chain Executive recently ran an article on “managing information technology costs in a challenging economy” that claimed right-sizing your IT budget and avoiding long-term harm to your company’s bottom line was a four step effort. Not sure it’s that easy, but it’s certainly worth some consideration.

The approach presented is as follows:

  1. Get a handle on the TCO of IT to the business
    Don’t overlook the “device propagation” that results every time a new application is added to the data center, the energy costs, and the support costs.
  2. Focus on the Cost Drivers
    Energy? Hardware? Software? Projects? Where’s the money going, and why? Treat the IT organization like it is a business and balance the supply and demand.
  3. Be relentless in Valuing IT services
    Examine the cost structure through the eyes of your customers and segregate functions and services into value-add and commodity categories and drive the associated costs accordingly.
  4. Be creative in meeting demand and sourcing work
    Examine the people, process, and technology infrastructure carefully to determine if there is a more cost effective way to deliver the necessary services.

I think this might be an over-simplification in some respects, as it does not address the identification of necessary vs. optional services, but one thing that I am sure of is that the answer, as the author points out, is not the typical five-step approach of (i) killing the capital projects, (ii) tossing the contractors out the door, (iii) deferring maintenance on existing systems (and letting the renewals laps), (iv) canceling training, and (v) slashing the travel budget to zero. That’s just a five-step plan to disaster.