Daily Archives: January 14, 2010

Will the Tigers Truly Latch On To Analysis and Optimization?

This is the Year of the Tiger (in more ways than one) and, according to a recent article in the SCMR on Supply Chain 2010 which quoted a recent AMR Research Survey on 184 companies that found that performance management was considered the most strategic supply chain technology investment, software applications in 2010 will focus on analysis and optimization.

I hope so, because it would be great if companies

  • actually knew how much they were spending,
  • who was getting the money,
  • what they were getting for it,
  • how much they should have paid vs,
  • how much they were invoiced, and
  • how much could have been saved with better information and more leverage.

And it would be wonderful if companies could clearly see that

  • lowest bid is not lowest TCO,
  • lowest landed cost is not lowest TCO,
  • lowest acquisition cost is not lowest TCO, and
  • even the lowest Total Cost of Ownership is not necessarily the best value because
  • Total Value Management means that you need the ability to simultaneously analyze cost, risk, and non-price factors to make the best buy decision.

So will it happen? Or will those few of you smart enough to understand the incredible value these technologies have to offer continue to outpace your competition by leaps and bounds for another year?

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If You Really Want a Renaissance Education …

then Get Back To The Classroom!

While I was pleased with the fact that the recent article on Supply Chain 2010 noted that a Renaissance education was needed in the supply chain because, in many ways, it is … I was very displeased to see that “employers are finding short term education most attractive as it doesn’t keep employees out of the office as much” and “can’t justify them being out of the office even for a full day”.

I’m sorry, but these are among the most imbecilic statements I’ve ever read. The cost of an employee being out of the office for a day is nothing with respect to the value a better educated employee brings to your organization, especially in supply chain. In fact, the cost of an employee being out of the office for three months is still literally nothing with respect to the value a much better educated employee will bring to your supply chain organization.

For example, let’s say that employee, who is well paid and makes 100K a year, is about to renegotiate a 10 Million dollar buy. Let’s say the price of the primary raw component is 10% higher than last year and you usually end up accepting price increases that equal 50% of the rise in the raw material index. This says you would be expecting a 10.5 Million contract renewal. Now let’s pretend that there’s a one day class on supply chain finance where your employee learns how, in some situations, companies can save big by financing supplier’s raw material costs. Let’s also pretend this smart employee comes back, does some research, and finds out your supplier is constantly carrying a credit line at 24% to finance the raw materials for the 60 days it typically takes to produce and ship the product and the 60 days it typically takes your accounts payable to pay. And let’s pretend that the raw material is 40% of the cost and that the supplier’s margin is only 10%. This says that the supplier is financing 40% of roughly 9M for 120 days at 24%. Doing some simple math, this says the supplier is paying roughly 288K (0.4 * .24/3 * 9M) in finance fees, or almost 3% of the sale, to service you.

Now, if your buyer figured out that if you bought the raw material on behalf of the supplier and charged them 0% interest that you would be saving them 3%, she could go back to the supplier and say “we know that your raw material costs went up 10% and that you’d normally expect a 5% price increase to cover this cost, but we also know we could take 3% off of your bottom line by buying the raw material for you and charging you 0% interest.” “So, since we also need to keep costs down, we’ll do this for you if you hold prices steady for another year. Your margin will be unaffected and we get better prices that allow us to outsell our competition. It’s win win.” The supplier, who we’ll assume is also well educated, agrees, and your buyer saves you almost 5% with respect to what you expected to pay, which equates to about 500K. Let’s assume this was an expensive one day seminar that cost 2K and tack that on to the 400 in salary and 150 in benefits it cost you for that employee to be out of the office for one full day. That says that the return on your employee being out of the office for one whole day was approximately 196:1. This says the author is purporting to tell me there are still managers out there who can’t justify a 196X return. Ouch! I was hoping their sorry asses would have been the first to be shown the door Fresh Prince style* because you can’t afford managers like that now that we’re returning to the old normal.

Now, this isn’t to say that I’m not a big fan of focussed half-day workshops or online self-study courses, because I am, but that you can’t overlook the value of a classroom education which cannot be equalled. While you can learn a fair amount from self-study, and should learn as much as you can to supplement and enhance your classroom education, you’re only going to learn so much from an on-line class. They’re great for learning the basics and will help you get the most from your classroom experience, as you’ll go to class prepared to engage in a real discussion and learn the advanced applications and deep concepts behind the material (and know what questions you really need to be asking), but they’ll never replace the education you get from a true sensei (which literally means “one who has gone before”). Plus, how much are you really going to learn at work, where you are interrupted with another “fire” or “emergency” every 5 minutes? To really learn something, you have to get out of the office, turn off all your electronic gadgets, and focus on the material. Then, you need to go back to the office and apply what you learned under the guidance of an old pro or a mentor. It’s as simple as that.

*This is how you show Maury the Management Moron the door, Fresh Prince style:

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