Monthly Archives: December 2009

Ode to the SpendFool

Traditionally, Sourcing Innovation would chronicle the wit and wisdom of the SpendFool on December 31, but ever since he announced his departure in the seventh comment to a post on SpendMatters last year, he’s been quiet. As a result, there are no comments to base my annual wit and wisdom post, which chronicled the best of the ‘Fool’s comments during the year. So instead, I bring you “Ode to the SpendFool” in the hopes that the ‘Fool will accept my offer and return to the space (as a[n anonymous] contributor on Sourcing Innovation should the ‘Fool so desire).

Ode to the SpendFool

so full of wit

who could strike down with his pen

the loudest of twits

Ode to the SpendFool

experienced and wise

since the departure of your voice

others have tried to improvise

but none have approached

the supernatural shiver

that your prophetic words

would always deliver

So I beg your return

before the realm of the blog

becomes a wasteland

covered in fog

For those of us left

fighting the surge

without your help

could soon be submerged

by the voices of irony

and the voices of doubt

and the voices of fear

that would spread chaos about

lies of omission

and tales of despair

of those that think before acting

and let their savings vanish into thin air

We know the truth

and spread it we try

but we’re few against many

who try to drown out our cry

So return to us SpendFool

let the space here you wail

with your pen on our side

we may yet prevail!

For those of you who yearn for yesteryear when the ‘Fool’s voice was strong,

here are quick links to the three “Wit & Wisdom of the SpendFool” posts:

Use Your Data Analysis System to Analyze Your Green Data and Save Money

As I noted in my recent post on Why You Need Visibility, if you put an energy meter inside a home and show people total usage in real time, a miraculous thing will happen: they will use about 10% less energy. And, more importantly, you can use this behaviour to drive savings, revenue, and innovation in your business. How? Consider these five uses courtesy of Andrew Winston and the Harvard Business Review which give you a green advantage.

  • Usage Reductions
    If you provide operations with information on resource use, they will be inspired to find ways to cut back.
  • Internal Competition
    Share footprint data across departments, organize a competition, and see the troops rally! Some factory heads would rather miss financial targets than green goals because its just too embarrassing to be at the bottom of the list. (And since every dollar saved goes straight to the bottom line, you might just find yourself more profitable in the current stagflation.)
  • Customer Inquiry Satisfaction
    A great green story can sway customers to your product, and if you are a CPG manufacturer, get you more prime shelf space at Walmart.
  • Initiative Prioritization
    A focus on the value-chain impacts of your operations can help you to quickly zone in on those initiatives that will deliver the biggest results.
  • New Market Opportunities
    When P&G did a study on detergent, they discovered the vast majority of energy use was a result of consumers needing to heat the water to use the detergent. Thus, they invented Tide ColdWater, which generated 2B in revenue in its first year. You could find similar opportunities.

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Why Supply Chains in 2015 Will Be Substantially Different Than Today

A lot of supply chain 20xx lists are produced each year, and while many aren’t worth a second glance, Dan Gilmore over on Supply Chain Digest has one of the best top 10 lists on what supply chains will look like in 2015 that you’re going to find. But what’s even more important than the items on his Supply Chain 2015 is why supply chains are being forced to change. I’ll attempt to answer that a bit in this post.

  • Fuel Prices Will Spike Again … to $200 a barrel
    Global demand is increasing daily. Emerging markets want their western lifestyle and the developed world is doing a very poor job of latching on to renewable sources (like wind, water, and solar … combined, these sources could easily power the Global Grids, but it will take a significant change in mindset as well as a very significant up-front investment for them to do so).
  • Generation Y Will Boycot You With Their Wallets if You’re Not Corporately Responsible
    In most surveys, your CSR policy is a greater concern to most job candidates than the size of the paycheck you’re offering. That’s because environmental consciousness is part of who they are and if they have a choice between two products and one is from a company that is not known for its environmentally friendliness, regardless of cost, guess which one they are likely to choose?
  • Product Lifespans will Compress Further
    As we haven’t reached the limit yet, our market induced appetite to always have the latest and greatest will continue to push manufacturers to innovate faster to keep their marketshare. If you can’t keep up, you will be pushed out.
  • Time-to-Market in Emerging Markets will be King
    The economies of Brazil, India, and China are poised to take off like a rocket … and they want what we got. The first company to identify a need and offer an affordable product to fill it will make the $2B in revenue P&G made in its first year on the launch of Tide ColdWater (the first detergent designed for cold water) look like petty cash. (Remember, there are 1.2 Billion people in India and 1.3 Billion people in China and the middle class population in both of these countries will soon exceed the total U.S. population, if they haven’t already given the current state of the U.S. economy and the real jobless rate of 17.5%.)
  • Inventory Costs will Continue to Increase
    Not because raw overhead costs will increase, but because inventory-related losses due to theft (which costs retailers alone 33.7B in the US) and obsolescence (which will force you to sell or dispose of inventory at a significant loss).
  • SaaS Will Be Better, Faster, Cheaper in Every IT Domain
    While there may still be application domains where it’s not there yet, you can count on that not being the case for much longer. Furthermore, even if you need your own single-tenant instance or data on site, you’ll soon see full-service completely hands-off managed SaaS where the application self-updates and self-replicates because your “instance” is part of the cloud on which it resides.
  • Real Time Information Will Be Ubiquitous
    Cheaper-than-dirt RFID and the emergence of web-based SaaS will quickly take us from an age where we don’t have enough visibility to where we almost have too much. Will you be ready to deal with it?
  • New Breakthroughs in Automation Will Emerge Globally
    Japan is already giving us robot secretaries and robot cats to keep them company. New production technology improvements can’t be far behind!
  • Emerging Markets Are On Their Way to Becoming the Dominant Global Markets
    As noted above, Brazil, India, and China will soon be three of the top five global economies. (China already is, but it will soon be #2.) Germany, France, and the UK will be dwarfed in comparison. If you’re not aligning your supply chains to serve the new GDP super powers, you won’t be a major player this century.
  • Everything will be Digitized
    iTunes has already killed the CD star; even BlockBuster understands that high-speed broadband will kill the DVD star; and when every smartphone has a 10 MP camera …

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Is Basel II Crippling Trade Finance?

The purpose of Basel II, the second of the Basel Accords (which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision), was to create an international standard that banking regulators can use when creating regulations about how much capital needs to be reserved to guard against financial and operational risks. In essence, the goal was to reduce risk and insure trade even in the event that a series of major banks collapsed.

But did it, in fact, accomplish the exact opposite? In two recent articles in the financial times which addressed the current trade credit shortages that are threatening to throttle the global flow of goods, we see that Basel II has become (an) obstacle to trade flows. It seems that the Basel II charter imposes a significant increase in the risk weighting for this activity, relative to its predecessor. (This is scary. Physical goods HAVE a value and invoices to solvent companies result in receivables and trade credit loans make a lot more sense than business development loans to risky start-ups or bail-outs to big corporations that ARE NOT too big to fail in this economy).

More specifically, the focus of Basel II on the “probability of default” of banks’ counterparts — which naturally increases during downturns — substantially exacerbates the negative effect of recessions on banks’ lending. In this context, Basel II has inadvertently become an obstruction to the very lifeblood of international trade. As a result, even though the World Bank (is) urged to lift trade credit finance by the primary global players in trade finance, until a review of the impact of Basel II implementation on lending activities is carried out and new recommendations are made, those companies that don’t take a different path to trade finance and start trading against accounts receivable on The Receivables Exchange (in the US) or Venture Finance (in the UK) are going to have a very rough road ahead.

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Key Success Factors for Commodity Risk Management

Accenture’s recent white paper on taking control in the new era or price volatility listed the following as the four most important success factors for managing commodity risk. At a high level, they’re spot on.

  • Procurement & Finance Alignment
    A risk policy needs to underlie all activities in both departments to insure the risk appetite of the buyer matches the risk appetite of the corporation. The mitigation strategies have to be implemented appropriately. These means that some risks cannot be ignored while others have to be carried.
  • Expertise in Managing Commodity Supply & Price Developments
    When do you buy, how long do you contract for, and how much inventory do you carry?
  • Visibility into Demand Throughout the Supply Chain
    This is the only way to truly measure the impact of raw material fluctuations on the business.
  • Effective Performance Measures
  • Specifically, measures which link the actual purchase price of a commodity to its market price which allow true savings to be calculated as a percentage savings against expected price and the impact of raw material price fluctuations to be assessed.

Unfortunately, the paper was sparse on implementation details, but here are some tips to get you started:

  • Aligning Procurement & Finance
    The key here is for procurement to lean the language of finance. You can start with Bob’s books on Straight to the Bottom Line and Beat the Odds and Dick’s book on Global Supply Management.
  • Managing Commodity Supply & Price Developments
    The key here is to stay on top of trends and understand what they mean. Your supply management blogs like Sourcing Innovation, Supply Excellence, and @ Risk will help you out here on a regular basis.
  • Demand Visibility
    Technology will really help out here. Get a good supply chain visibility platform with good forecasting capabilities and you’ll get a handle on how much you need and how long you should be buying for.
  • Performance Measurement
    As the white paper noted, year-over-year savings is not a good measurement. What if raw material prices dropped 20% and you only saved 10% — then you left 10% on the table. That’s not good at all. Similarly, if raw material prices went up 20% above the board and you kept cost increases to 10%, that’s a big, big win. Year-over-Year doesn’t capture that. You should be measuring year-over-year savings as the % change in cost over indexed raw material prices. The calculation is a bit more involved than a simple year-over-year differential, but a much more accurate view into how your supply management organization is truly performing. An example calculation is below given the following raw material costs:
    Raw Material Index Price per Unit Units per Commodity Cost per Commodity
    X $10.01 0.47 $4.70
    Y $7.57 0.34 $2.57
    Z $6.66 1.21 $8.06
        TOTAL $15.33

    If you paid $19.64 per unit, then you paid 128% of indexed raw material cost per unit. If, when you did the calculation last year, you paid 135% of raw material cost, then your year-over-year savings is 7% over indexed raw material cost, which is a 25% improvement (7/28).

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