Monthly Archives: May 2009

Import Duty Reduction: Not Just for Large MultiNationals Anymore

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CFO recently had a great article on how small and midsize business can use the same customs-duty strategies large multi-nationals use to save a hefty chunk of change in a recent provacatively titled article. As larger companies well versed in global trade know, import duties, unlike income tax rates, can change dramatically depending on the way goods are described or the way the products are packaged and assembled. The article gives the classic case of microscopes used for surgery. In the early 1990s, they were lumped in with laboratory microscopes, which meant the device carried a 7.2% import duty. However, once manufacturers argued that the device was a surgical instrument, it became duty free. In other words, intended used can often be used to recategorize an item into a lower duty bracket. Another example is a woman’s cotton T-shirt. As sleepware, it carries an 8.5% duty, as swimwear, it carries a 14.9% duty.

Also, retail sets can sometimes carry a lower effective duty than the individual items they contain, and sometimes carry a higher effective duty. Thus, if you plan to combine the items into a set, you should do the import math and determine if it’s more cost effective to assemble the items before, or after, import.

Another great piece of advice from the article is keeping full documentation of the entire trade cycle. If you use a distributor (to purchase goods from a manufacturer on your behalf), that distributor will apply a markup to the goods. However, if you retain the documentation necessary to show the purchase by the distributor was an arms-length purchase and that the goods were clearly destined for the US, you can have the import duty assessed at the cost to the distributor, not the cost to you, which could save you 10% to 20% of the duty cost.

And don’t forget about how FTZs help U.S. companies save millions during tough economic times.

Ten Tips to Maximize Your Working Capital

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A recent article in the Supply Chain Management Review, a publication which never fails to deliver high quality content month after month, tackled the fact that, for better or worse, in this economy cash is king and you need to do everything you can to improve your working capital without hurting your suppliers. That’s why this was such a great article, it wasn’t the usual “reduce days sales/receivables outstanding and increase days payable outstanding” BS that doesn’t really help anyone. It was ten well thought out points of advice to help you tackle and analyze your supply chain and working capital situation and make good decisions on how to improve it.

The article noted that the first thing you have to do is get the organization working off of one set of numbers. Sales, operations, production, and procurement often work off their own sets of forecasts, padded to insure they are not penalized for late delivery. Adding excess inventory in every step of the chain can tie up a lot of cash needlessly. Also, while operations focusses on lead time, work order, surplus, quality, part, and finished good metrics, finance focusses on ledgers, forecasts, reserves, write-offs, debt, capital, and cash. The organization needs to focus on a common set of metrics and numbers that take into account the needs of both divisions and manage of those metrics and numbers together. Then, focus on each of the following points.

  1. Get Back to Basics
    Understand the planning parameters and whether or not they reflect (the new) reality. Only then can you build true models and forecasts.
  2. Get the Data from the Source
    The best way to find cash is to follow the cash trail and see where it is needlessly tied up. Create reports that monetize cash-critical decision points in key processes.
  3. Educate Finance on Operations
    Tie operational metrics to financial metrics to help finance understand the cash-flow requirements and break down the organizational silos.
  4. Educate Operations on Finance
    Tie financial performance to operational impacts to help operations understand the working capital restrictions and break down the organizational silos. Make sure operations understands how they contribute to RONA, ROIC, and ROCE.
  5. Benchmark Performance to Policies, Industries, the Fortune 500
    Are you exceeding your standards? Your peer group’s standards? The standard for big industry at large? If not, you have room for improvement.
  6. Establish a Metric Hierarchy Focussed on Freeing Up Cash
    For example, casual metrics such as early receipt of material value, quality discrepant material value, surplus material value, early purchase order to need date material value all directly influence the top level metric of days of inventory outstanding (DIO), which ties up cash and influences your top level metrics of RONA, ROIC, and ROCE as every day you hold inventory adds cost which decreases profit which decreases return. Understand your metric hierarchy and monitor the low-level metrics daily to identify little problems before they turn into big ones.
  7. Establish a “Cash Council” of Cross Functional Executives
    Improving cash flow and working capital needs to be everyone’s responsibility.
  8. Aim High, and Re-Evaluate the Business Model
    Creating a goal to reduce working capital requirements of the business by 30 percent may not be attainable by efficiency improvements alone. The business model may need to be evaluated and updated in areas such as customer contract type and terms, vendor management of inventory, outsourcing of business processes, portfolio re-alignment, divestitures or acquisitions, supply chain restructuring, and new partnership or joint venture agreements. And that’s good. A better business model may bring other improvements as well.
  9. Invest in Systems to Automate (Working Capital) Performance Reporting
    Don’t waste time building reports … spend time evaluating and diving into reports, getting to root causes, and solving the issues.
  10. Review Cash Policies on a Periodic Basis
    External business conditions and internal performance capabilities can change, which requires periodic review and update of key policies driving cash and working capital consumption.

While Others Slow Down … Sourcing Innovation Revs Up!

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While many organizations, including those you belong to, will slow down, go on vacation, and generally take it easy over the summer months (in the Northern Hemisphere), Sourcing Innovation is going to take it up a notch and bring you even more insight and innovation.

I’m excited to announce that, starting the first week of June, you’ll see three new regular contributors appear on SI and more regular postings from two of your favorite guest authors and that, by mid-month, more contributors and guest authors should be ready to go. Starting the week of June 1st, we’ll see:

  • Eric Hiller, the Enterprise Cost Master of Hiller Associates
    As a co-founder of Apriori and a former blog master of Cost Cents, Eric brings a wealth of Enterprise Cost Management knowledge and experience with him from both the consulting and implementation sides of the business. Not only will he discuss ways to save money through better cost management, but he’ll also highlight many of the common mistakes made by production and supply management that cost the business money.
  • Norman Katz, the Founder and President of Katzscan and its Supply Chain Fraud practice
    Norman is an expert in supply chain risk, supply chain fraud, and risk and fraud prevention who has been helping companies secure their supply chains for over 15 years.
  • Dick Locke, the International Sourcing Specialist of Global Procurement Group
    Dicke Locke, who brings over 30 years of international sourcing experience and expertise to every engagement, has been helping Fortune 3000 global companies do global business since 1993 though his books, seminars, workshops, and consulting. Author of Global Supply Management: A Guide to International Purchasing and co-creator of the new Basics of Smart International Procurement from Next Level Purchasing, Dick Locke is a reknowned expert in the ins and outs of international sourcing and procurement.

and we’ll also see more guests posts from

  • Kevin Brooks, a B2B 3.0 Visionary who has worked his magic at Ariba, Apexon, and TrueDemand
    Kevin brings with him a wealth of knowledge about the impact and usefulness of Web 2.0 and B2B 3.0 platforms (and collaborative and social networking platforms in particular) in supply management, a wealth of experience in performance monitoring and improvement, and the experience of an early advocate for green supply chain analytics and capabilities.
  • Eric Strovink, the Chief Cuber of BIQ
    An experienced professional who has been building transactional, analytic, and business intelligence systems for end-to-end business operations, including supply management, for over 20 years, Eric brings a deep knowledge of the many ways technology can be used to impact a business in a powerful manner and find productivity improvements and cost savings no one ever even knew existed.

and more voices will be joining us in the future because Sourcing Innovation is where thought leaders converge.

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

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In a recent post over on his Purchasing Certification Blog, Charles asked why doesn’t Procurement save as much on non-traditional categories in response to his review of Aberdeen’s latest CPO Agenda research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!

Finding a Good Sustainable Charity

Finding the right charity to donate too — and by that I mean one that’s likely to use your money to actually help someone besides the administrator — can be tough. That’s why I found the recent article on best questions to ask a charity quite useful. It presented a great flowchart that you can use to determine whether or not the charity hitting you up might be worth donating to.

In brief, the following questions, which should all be met with a resounding yes, are quite important:

  • Are you recognized as a charity by the government? (IRS, CCRA, HMRC, etc.)
  • Have you been around for at least five years?
  • Will at least 75% of my money to to charity?
  • Do you have at least a year’s worth of working capital?
  • Are you cutting services this year?

Basically, a good charity is:

  • Recognized.
  • Not a Fly-By-Night operation.
  • Efficiently run.
  • Financially sound.
  • Committed to its goals.

Deserving of your support and a good use for the budget you have set aside for funding your CSR initiatives.