Daily Archives: April 26, 2010

Strategic Spend Visibility: Untapped Potential for Cost Reduction

Chances are that most sourcing professionals have read all of the Aberdeen and AMR reports on spend analysis and spend visibility and are quite impressed at the opportunity for savings they reported — on the order of 10% to 15% on 55% to 75% of untapped spend and 6% of spend in managed categories, and are now itching to bring spend analysis and spend visibility into the organization. But before this step is taken, it is important to realize that these research reports fail to consider the spend analysis value curve, which tends to flatten out within one to three years. That’s right! If an organization embarks on a traditional spend analysis and visibility program, which is tactically oriented, it will find that the savings opportunities quickly dry up and that the 5X to 10X ROI that was initially experienced quickly becomes, if the organization is lucky, a 1.5X to 2X ROI. This is because all the platform does is help the buyers maintain negotiated cost reductions during contract renewals and catch repeated attempts at maverick spending after organizational users think that they are no longer being watched.

Why do the savings disappear so rapidly with a traditional, tactical, spend analysis or spend visibility initiative? Because there is only so much that can be done with Accounts Payable (AP) data. More specifically, all that AP data does is identify the top spend buckets by supplier, category, and commodity, and, correspondingly, the low-hanging fruit savings opportunities which are easily identified as the top categories, commodities, and supplier relationships where the organization doesn’t have contracts and performance management programs in place (and where the typical payment amounts are above the range that defines “market average”). Since this analysis is relatively quick and easy to do (once there is visibility into organizational AP data), and since a good spend visibility solution will decrease sourcing cycle time by 50% to 75%, it’s not long before an average organization exhausts its savings opportunities from a tactical spend visibility project.

But this doesn’t have to be the case! A shift from a tactical view to a strategic view, which includes other types of data, can multiply savings opportunities and, more importantly, find new opportunities year after year. For example, adding invoice data allows for the identification of overpayments and uncollected rebates, which are common in categories like office supplies, electronics, and (offsite) storage and which often represent millions of dollars in instant refunds. It also allows for the improvement of inventory turns, which can quickly shave 10% to 20% off of inventory costs.

And if the data is enriched, a whole plethora of new opportunities open up. Adding diversity data allows an organization to target government MWBE programs. Third-party corporate data can be used in fraud detection. Carbon footprint data enables regulatory compliance. And so on. The opportunities, and savings, become endless. In fact, a strategic program could multiply the organizational savings opportunity by five in the first three years and generate strong returns for years to come! That’s why strategic spend visibility is needed.

And that’s why you should download Sourcing Innovation’s new Illumination, sponsored by Rosslyn Analytics, on Strategic Spend Visibility – Untapped Potential for Cost Reduction (Page Down; Registration Required). It just might change the way you think about spend analysis and spend visibility.

Webinar Wackiness V: Webinars This Week from the #1 Supply Chain Resource Site

The Sourcing Innovation Resource Site, always immediately accessible from the link under the “Free Resources” section of the sidebar, continues to add new content on a weekly, and often daily, basis — and it will continue to do so.

The following is a not-so-short selection of over 15 webinars THIS WEEK that might interest you:

Date & Time Webcast

14:00 GMT-04:00/AST/EDT

How to Save Millions through Supply Chain Optimization

Sponsor: FICO


8:00 GMT-07:00/MST/PDT

Maximizing Profits and Reducing Costs Starts with Oracle Data Governance Manager

Sponsor: Oracle


12:00 GMT-04:00/AST/EDT

Effectiveness of Green Supply Chain Initiatives: Rankings, Indicators, Benchmarks

Sponsor: PMAC


11:00 GMT-04:00/AST/EDT

How CFOs can Maximize ROI and Business Value from Source to Pay

Sponsor: SSON


10:00 GMT-04:00/AST/EDT

A Fresh Approach to Supply Chain Fundamentals

Sponsor: ModusLink


9:00 GMT-07:00/MST/PDT

PLM 101: Introduction to PLM

Sponsor: Siemens


10:00 GMT-05:00/CDT/EST

The Top 6 Strategic Business Questions That HR Leaders Need To Answer

Sponsor: SuccessFactors


12:00 GMT-04:00/AST/EDT

GDM Introduces Business Intelligence Application to Help U.S. Communities Attract Businesses and Create Jobs

Sponsor: Global Data Mining


14:00 GMT-04:00/AST/EDT

Reduce Costs and Improve Visibility with Real-Time Supplier Communication: A Case Study on Rockwell Automation

Sponsor: Industry Week


15:00 GMT-04:00/AST/EDT

What Keeps a PMO Director Awake at Night: Selling the Value of PPM to your Executive Team

Sponsor: Project Assistants


10:00 GMT-04:00/AST/EDT

New Realities in IT Spending from CIO and CFO Perspectives

Sponsor: Gartner


13:00 GMT-04:00/AST/EDT

Thought Leadership in Indirect Procurement Series entitled

Sponsor: HCM Works


15:00 GMT-05:00/CDT/EST

CPSIA: New 2010 Product Safety Regulations – Can Your Company Survive An Audit?

Sponsor: Rollstream


14:00 GMT-04:00/AST/EDT

Getting started with requirements management to better meet the needs of customers

Sponsor: Siemens


10:00 GMT-07:00/MST/PDT

Assessing your CW program: What metrics are your C-level executives interested in?

Sponsor: FieldGlass


11:00 GMT-04:00/AST/EDT

Best Practices in eCatalog Management

Sponsor: Ariba

They are all readily searchable from the comprehensive Site-Search page. So don’t forget to review the resource site on a weekly basis. You just might find what you didn’t even know you were looking for!

And continue to keep a sharp eye out for new additions!

Will High Priced Logistics Mean the End of the China Surge?

Last year, David Jacoby wrote in The Economist Guide to Supply Chain Management: How getting it right boosts corporate performance that China’s high supply chain costs are limiting its growth. Noting that, as per a recent study by the US Chamber of Commerce, China’s logistics costs are the second highest in the world at 22% (compared to the global average of 13%), China is choked by the high cost of inbound logistics.

With the rising cost of production in China (as more and more middle class workers demand higher salaries in their quest to maintain a middle class life style on par with their peers in other parts of the world), repeated calls to allow the yuan (which is rising against the US Dollar [WSJ]) to float with the market, and rising raw material and oil costs, it appears that China’s days of being a LCCS destination might be coming to an end if it doesn’t get its logistics costs under control.

Now, you can argue, as Jacoby points out, that China’s government is investing massively in infrastructure, having recently laid out a broad-scale and ambitious programme to improve supply chain performance by creating third-party logistics (3PL) enterprises and deregulating certain transportation areas; promoting the establishment of logistics networks throughout the country; and building 30 modern logistics parks that will serve as distribution centers throughout the country in their 11th five-year plan, but you could also counter-argue the facts that the Shenzhen Dongdao Logistics Co. became insolvent and collapsed on January 25 and Guangdong-based Nan Yue Logistics posted an RMB 190 Million loss in 2009. In other words, it would appear on the surface that logistics are becoming too costly for even the logistics providers in China, yet alone the foreign buyers who need to use them.

So is this going to mean the end of the China surge, and an eventual shift to new LCCS locales when the market returns? Or will China find a way to get its logistics under control? Not Necessarily. For what it actually means, we turn to Dick Locke, SI‘s resident expert in international trade.


Well frankly I don’t believe the US Chamber of Commerce. I don’t think it’s because of their anti-Health Care, anti-regulatory reform, anti-environmental policies but that doesn’t help their credibility.It’s because there is such a trade imbalance from China to the rest of the world that logistics costs into China have been dirt cheap for years. Freight companies were moving 40 foot containers from Europe to China for around $400 back in the boom days.

Here’s an excerpt from an academic paper on trade imbalance in container movements in and out of China. TEU means “Twenty Foot Equivalent Units.”

  On the transpacific trade the imbalance in 2006 was 1:2.6 in favour of eastbound traffic, with demand for 14.3 million TEU eastbound, and 5.5 million TEU westbound. Meanwhile, on the Asian-Europe trade the imbalance was 1:1.8, in favour of westbound with carryings of 7.5 million TEU and 4.1 million TEU eastbound (Robinson, 2007).

And the WSJ says the yuan is strengthening? Excuse me? Where do they get that? On the first of the year the dollar was worth 6.8291 yuan. Today it’s worth 6.8360. (oanda.com) Maybe the WSJ is careless about verb tenses and means it will strengthen soon. It might. It might not.

When will the China surge be over? That’s a product by product question but the general answer is when you can find better suppliers elsewhere. No one’s buying a third of the way around the world unless the suppliers there are the best. But you need to test other countries periodically. Global Sourcing is like painting the Golden Gate Bridge. You never finish.

In other words, the cost of logistics is all relative and it’s the total cost that matters in the end. While China, and its suppliers, remain highly competitive, it will be the location of choice.

The reality is that while logistics costs in China might be “high” relative to its GDP, they’re still “low” in absolute cost compared to costs for moving the same volume in the developed world. The yuan may be “rising”, but it really hasn’t risen much against the American dollar, so it’s still not an issue. And wages may be rising, but they’re still rising by pennies, not dollars, and the wage costs are still relatively insignificant. In other words, all the noise you hear is just much ado about nothing … and it’s time to go and buy another can of vibrant orange paint.

Share This on Linked In