Daily Archives: May 5, 2009

Inventory is Very Expensive

A classic article in the Supply Chain Management Review does a great job of overviewing the cost components of inventory and breaking down what the total cost of ownership really is.

Simply put, the following costs are associated with holding inventory:

  • Product Costs
  • Warehousing
  • Depreciation
  • Obsolescence
  • Pilferage
  • Damage
  • Insurance
  • Taxes
  • Capital Cost
  • Administrative Costs

And that’s why, in an average scenario, in an average organization, the total cost of holding inventory is over 30% of the base purchase cost.

And that’s why you need to examine that special volume discount carefully next time your supplier offers you a special, limited-time, “buy more now, save more now” offer. Chances are, the supplier is just trying to pass their inventory costs on to you … which far exceed the meager discount they are offering.

An Enterprise Software Buying Guide, Part I: Overview

Buying enterprise software isn’t easy. In fact, it’s just as complicated as global sourcing, if not more so (and that’s why IT professionals make great global sourcing professionals, as noted in this recent article from Global Services). You’re buying something that’s immaterial and, these days, ephemeral, but just as costly once all the “hidden” costs are taken into account.

What’s worse, a mistake can cost you many times the initial purchase price. Accidentally spot buy 10,000 parts incompatible with your current assembly? You sell them at a 10% loss, take a one time hit, learn your lesson, and move on. Move too quickly on that new, on-premise, e-Sourcing platform to take advantage of that limited time “special discount” and lock in a five year term on a platform that is thoroughly incompatible with your ERP? There’s an additional seven to eight figures, up front, of custom integration work plus significant third party maintenance each year to keep the middleware running each time you patch your ERP or your new e-Sourcing platform and “break” the custom middleware.

Thus, when it comes to enterprise software, you need to be prepared. In this 8-part series, I’ll attempt to walk you through each step of the enterprise software buying process, point out what you need to watch out for, and pass on some of the secrets of successful software purchasing.

First of all, let’s outline the basic process.

  1. Form a Cross-Functional Team.
  2. Document Your Needs.
  3. Identify Potential Solutions.
  4. Build Your Cost Models.
  5. Define Your Objective.
  6. Negotiate Professionally.
  7. Comb the Contract.
  8. Manage Performance.

Sounds simple enough, doesn’t it? Too bad each step is a virtual minefield laden with explosives that can blow up your costs, your project, and your organization’s trust in you. That’s why we’re going to examine each phase in detail.

When you get right down to it, enterprise software is a serious commitment. Even if you are able to divorce yourself from a system (or a vendor) after signing a contract, you can bet that it won’t be before you incur a significant penalty. (Even if the vendor is a “quit anytime you want” SaaS vendor. There’s always a cost, even if it isn’t always paid direct to the vendor.) Plus, you’ll have to move all of your data to a new system, which will likely require custom development work to integrate it with other systems and cause your losses to mount in this double whammy scenario. Of course, you’ll take a productivity loss while your employees are left without a system (and if it’s a supply management system, the disappearance of a key piece of analytics technology could result in uninformed buyers making less-than-optimal, and costly, sourcing decisions). That’s why you have to do everything you can to make sure you select the right system up front.

In our next post, we’ll discuss cross functional team formation.