Daily Archives: September 4, 2009

Sourcing Innovation Brings You The Best From the Best

Starting next week, Sourcing Innovation will be running a special series on “Sourcing Tomorrow: The e-Leaders Speak” that will feature pieces from the visionaries behind many of the top e-Sourcing and e-Procurement vendors. So far, a dozen leaders of a dozen leading e-Sourcing and e-Procurement vendors have agreed to put their thoughts to paper on what technologies and strategies you can use to climb out of the recession and ride the leading edge of the wave to recovery. Up first will be Iasta (David Bush), Vinimaya (Gary Hare), Enporion (George Gordon), Trade Extensions (Garry Mansell and Chetan Raniga), and SafeSourcing (Ron Southard). Aravo (Kevin Cornish), Coupa (Dave Stephens and Jason Hekl), and Ketera (Chris Newton), and possibly a few others, have also agreed to participate.

But Sourcing Innovation isn’t going to stop there! After that, Sourcing Innovation will be bringing you “Sourcing Tomorrow: The Service Leaders Speak” where the likes of Jim Wetekamp (of Bravo Solution), Bart Richards (of The Claro Group), Bob Rudzki (of Greybeard Advisors), Mark Usher (of Treya Partners), and William Dorn (of Source One Management Services), among others, will be bringing you their thoughts on how service and solution providers can help you climb out of the recession and ride the wave to profitability faster than your competition.

And Sourcing Innovation isn’t going to stop there either! When the second series is complete, Sourcing Innovation is going to invite selected bloggers to respond to the first two series and the changing markets with their thoughts.

But that’s not all! Sourcing Innovation also plans to run a couple of very special series this fall. First up will be an 8+ part series on Overcoming Cultural Differences in International Trade, partially based on the work of our resident expert on international trade, Dick Locke. This series, which will be edited by none other than Dick Locke himself, will address some key issues in International Purchasing and how they materialize in your global sourcing endeavours.

As promised in Supercalifragilisticexpialidocious, Sourcing Innovation will also run a multi-part series that dives into the recent CAPS Research focus study on the role of optimization in strategic sourcing. Taking it piece by piece, I will address the points that need to be highlighted, the points that need to be addressed (but weren’t), and the points that were a bit misleading and make sure that, once you have digested the report and this special series, you have the best understanding of today’s strategic sourcing decision optimization technology that you can have.

I’ll also be reviewing some of the new releases by those vendors that decided to keep their heads above the sands and innovate through the downturn (and maybe I’ll even coerce the Sourcing Maniacs out of hiding).

And that’s just the beginning. Stay tuned!

When the Market Recovers, Will You Have Logistics Capacity?

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A recent article in Industry Week, which noted that logistics [is] on a bumpy road to recovery, had a scary statistic: 7% of the available capacity on US highways was eliminated last year as more than 3,000 trucking companies went out of business. And many more have went belly up since the year began. While the stats are not yet known, I’d estimate that over 10% of 2007 capacity has disappeared. When you consider that the capacity was almost fully utilized, this is not a good thing, as rail only gets you to a rail yard, not to your DC or the store.

And while you should definitely be using more rail, as this could significantly lower your (domestic) fuel usage and shipping costs, you still need the trucks for the “last mile”. Thus, you should be analyzing the state of your carriers now, their capacities, and locking in guarantees before they become scarce when the economy turns around again. Otherwise, you might see a large spike in your logistics costs again which would hurt your chances of a quick recovery.

Are Bad Financial Tools Killing Your Innovation?

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Not enough companies are innovating, even though it’s doubly important that they do so given the current economic climate. Now some companies don’t, and probably won’t ever, get the importance of innovation, and as sad as it is, I get that. A few companies do get the importance of innovation, and are still focussed on innovation. And then there are those companies where the leading thinkers get it, but the management says no because it’s too expensive and too risky, despite the low-risk proposals and high ROI presentations that are put forward by brilliant staff.

Needless to say, this has perplexed me because while I know for a fact that there are always going to be those managers who are just too stupid to get it, I have to assume this is not the case at the average company because most boards don’t put up with idiots for too long, especially when business is going down the tubes. So I did some research, and stumbled upon a great article in last year’s Harvard Business Review that might account for some of the reasons management says no when they should be saying “that’s great … do it now“!

In Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things, the authors highlight three financial analysis tools whose misguided application will cause a CFO to say no to innovation every time, even when the answer should be an exuberant yes. More specifically, the following financial methods tend to lead the CFO, and management, towards the event horizon of the do-nothing black hole where they get sucked in to the forever stagnant singularity from which they’ll never escape.

  • Fixed and Sunk Costs
    The method of evaluating fixed and sunk costs with respect to future investments confers on unfair advantage to the status quo.
  • Share Price
    The emphasis on earnings per share as the primary driver of the share price to the exclusion of almost everything else diverts resources away from investments whose payoff, no matter how large, lies beyond the immediate horizon.
  • Discounted Cash Flow (DCF) and Net Present Value (NPV)
    The common application of these methods to evaluate investment opportunities causes managers to underestimate the real returns and benefits of investment in innovation.

Of these, the DCF and NPV is probably the deadliest because its often the first calculation done by the CFO, and when your proposal fails this biased sniff-test, your project is stopped cold in its tracks.

So what’s the problem? Why does the DCF, which should be capturing the financial benefits of ROI innovation projects, instead illustrate that they will yield less of a return than the status quo?

The problem, referred to as the DCF trap, is that when most financial managers compare the expected cash flows from an innovation project against the default scenario of doing nothing, they incorrectly assume that the present health of the company will persist indefinitely if the investment is not made. We all know that this is not the case. Pick a vertical … any vertical … the sale of every product declines over time because people always want “new” and “improved”. It’s nothing new. Archaeologists have illustrated that the life-cycle of pretty much every “invention” throughout history followed the battleship curve. This means that, if you do nothing, sales will eventually start to decline.

If, instead of assuming flat line revenues for doing nothing, the financial manager correctly assumed declining revenues starting 6 months to 3 years out (depending on the vertical and product line), they’d quickly see that the loss associated with doing nothing is much greater than the “sunk cost” of a new innovation project, even if the ROI turned out to be less than expected.

Long story short, next time you’re turned down on an innovation request, ask why. When they say it costs too much, or the risk is too high, ask to see the calculations. Review them, find the “trap”, redo them, and try again. You might not succeed (because some managers will never admit their mistake), but if you start educating them, maybe the next project you present will get approved, allowing you to get back on the road to innovation.