Monthly Archives: September 2010

Health Care Costs, Working Capital Improvement and Supply Management in the Same Sentence?

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

A previous post showed that top performing companies among the US-headquartered 1000 companies, as measured by Days Working Capital (DWC) improvement, focus on all three sub-metrics of DWC:

  • DSO – Days Sales Outstanding
  • DIO – Days Inventory Out Standing
  • DPO – Days Payables Outstanding

The data, as compiled, analyzed and reported by CFO Magazine(c)also performs an analysis on the above metrics by industry sector. The top culprits, or bottom three performers, as per Table 1, were in Healthcare Equipment and Supplies, Biotechnology, and Life Sciences Tools and Services. Two other sectors, Pharmaceuticals and Health Care Technology were in the bottom third percentile of all 59 industry sectors (GICS Industry Level). All these industries can be classified as health related industries (HRI).

Table 1: Days Working Capital by Industry Sector

Causes

While many enterprises are different, thus requiring customized initiatives to improve working capital performance, a detailed look into the three sub-metrics yields the fact that HRI sub-sectors (other than pharmaceuticals) fall in the bottom third percentile of all industries in DPO, Table 2.

Table 2: Days Payables Outstanding by Industry Sector

To sum it up, HRI organizations, on average, pay suppliers much quicker than the average of all sectors — in some cases more than twice as fast as the overall average. The question can be asked: “why do these organizations pay their suppliers/sub-contractors so quickly”? Based on the very nature of HRI — highly proprietary and cutting edge products, and based on reviewing detailed SEC filings, the following conclusions can be made:

  • Some strategic materials are sole sourced,
  • Outsourced R&D (including clinical trials) and,
  • A reliance on favorable fluctuations in the strength of the US dollar

One can surmise that suppliers to HRI are very strategic and hold strong leverage to their HRI customers.

All point to the fact that this sector, perhaps like no other requires strong and senior-level attention to supply management initiatives.

Conclusion

One can conclude that in HRI, the suppliers hold the leverage in these relationships, which means it is paramount for HRI organizations to proactively approach supply-management in a collaborative manner that encourages mutual benefit. Of the various known strategies, two come to mind:

Leverage early-payment discounts: This strategy may already be occurring. HRI finance teams must perform a cost-benefit analysis to determine if taking advantage of early-payment discounts yields stronger returns vs. freeing up working capital.

Supply-Chain Finance: Potentially the best strategy since neither organization’s working capital is adversely affected. Again, a cost-benefit analysis must be performed to determine if any new finance charges yield stronger returns.

In general, enterprises in the HRI sector may wish to address the question:

How Do We Improve Each Other’s Working Capital Without Adversely Affecting Other Financials?

Thanks, Sudy.

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Five Ways to Maximize Profits from Supplier Automation

A recent article in Industry Week on 5 Ways to Maximize Profits from Supplier Automation had some good tips on how to maximize your return from your supplier automation, provided they are implemented properly. This post will explain how to get maximum results from Industry Week’s tips.

  • Avoid the 80/20 trap

    When you only automate 80% of your suppliers, what happens is that the remaining 20% consume 80% of your procurement staff’s time and effort who have to enter data, track down errors, and deal with inquiries that would be avoided with an automated system. In other words, 80% isn’t enough. You have to keep automating until the return isn’t worth the investment. While this number will vary from company to company, generally, you have to insure that at least 90% of all document exchange is automatic, if not 99%. You keep going until the ROI (annual savings / annual cost) of automating the next supplier is less than c, for c between 2 and 3.

  • Make it Affordable and Beneficial

    Not only does it have to be affordable, but it has to make your suppliers’ lives easier. If not, it won’t be adopted.

  • Beware the Middle Man

    As the article says, another unnecessary, and completely avoidable, cost, for both you and your supplier, are the recurring monthly fees charged by “Value Added Networks” (VANs) or other such middle party service providers. Let’s face it, you know who your suppliers are, and your suppliers are quite willing to make their catalogs available to you for free because they want your business. Don’t pay an extra fee for what you already know and have access to.

  • Make Supply Chain Data Actionable

    Automating document transfer enables transaction savings by significantly reducing processing costs, but it doesn’t provide strategic savings unless you act on it. Make sure the tool allows for event driven, alert-based workflows that allow you to detect unexpected events and patterns as they happen so that you can make course corrections “mid-stream”.

  • Measure and Respond

    Continuously benchmark tool usage and process times and take action if the benchmarks don’t continuously improve.

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Sometimes the Cantankerous Supplier is Right!

Even if they are too late with respect to demonstrating their correctness.

But let’s back up. Recently, on the Purchasing Certification Blog, Charles penned a great post on “the real reason buyers don’t want to give suppliers feedback”, which, in his words, were

BECAUSE WE DON’T WANT TO PUT UP WITH THIS CRAP!

where the crap in question was the salesperson effectively saying, with their incessant badgering that no other company can produce the same product of the same quality at the same price with the same service, that you are stupid. You don’t know how to make a good decision and you don’t know how to evaluate prospective suppliers.

As Charles’ points out, it happens all too often, and most of the time, the supplier is full of crap. But sometimes the supplier isn’t — and this is often true in custom manufacturing and services. I see it in IT all the time. The buyer doesn’t really understand what’s involved in building or customizing a piece of enterprise software or system and goes with one of the low bids and ends up getting a stinking pile of crap that not only costs 50% more due to project and budget overruns, but is delivered full of bugs, doesn’t include 20% of the originally specified functionality, and takes three times as much manpower to support as it should. In the end, by the time all of the extra service and support costs are factored in, it costs three times as much as the high bid from the one firm that really understood what it was doing. The same is true in custom manufacturing. There are some corners that can’t be cut, and accepting a bid that does so leads to long term cost ramifications.

However, the supplier should still back off once the buyer has made an award decision, even if it is the wrong one. Because it is not the buyer who made the stupid decision, but the supplier. If the supplier truly had a better product of a better quality at a better price and service level, then the supplier should have taken the time to provide the buyer with the education she needed to understand that when the supplier had the opportunity. Instead of chest thumping about how great they are and how they are so much better than the competition, the supplier shouldn’t have even tried to sell at all. They should have said “we know we can meet your needs better than any of our competitors, but that’s not important. What’s important is that you understand why we can do that. For you to truly understand how we are better, you need to understand what the major drivers of cost, quality, and service are around this product. So we’re going to help you with that.” And if they truly were the best solution, then the buyer should be able to see that and choose them. (And if they truly were the best solution and the buyer didn’t see it, is that a buyer the supplier really wants to be working with?)

And regardless of whether or not the supplier has the best solution or not, once the buyer makes her decision, the supplier has to back off, and this is the only appropriate response from the supplier.

“We’re very sorry to hear that you chose someone else. We still believe we could provide you the best overall value with respect to your needs and would appreciate the opportunity to try again at the appropriate time. Could you let us know when you expect to be going out to market again for this product so we can contact you again at the appropriate time to request the RFP? Also, if your chosen supplier proves unable to meet all of your needs, please feel free to reach out to us at any time. Thank you again for the opportunity and we hope to have another opportunity to compete for your business again in the future.”

Anything more and the buyer has every right to blacklist the supplier.

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Upcoming Webinars from the 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.

The following is a short selection of over upcoming webinars that might interest you:

Date & Time Webcast
2010-Sep-8

14:00 GMT-04:00/AST/EDT

 5 Ways to Reduce Your Operating Costs and Improve Service Levels

Sponsor: MSPmentor
2010-Sep-8

13:00 GMT-04:00/AST/EDT

 COTS Software Validation – 10 Easy Steps

Sponsor: Global BioPharmaceutical Resources
2010-Sep-9

13:00 GMT-04:00/AST/EDT

 21 CFR Part 11 – the details of what it means

Sponsor: Global BioPharmaceutical Resources
2010-Sep-9

9:30 GMT-04:00/AST/EDT

 Competitive Compliance

Sponsor: Global BioPharmaceutical Resources
2010-Sep-9

10:00 GMT-04:00/AST/EDT

 Using Exception Management to Improve Demand Planning & Execution

Sponsor: SAS
2010-Sep-14

11:00 GMT-07:00/MST/PDT

 S&OP and Trading Partner Collaboration

Sponsor: BoardWalkTech
2010-Sep-14

14:00 GMT-04:00/AST/EDT

 Improving Visibility Into Your Business Will Change Your World

Sponsor: Natural Synergies
2010-Sep-16

11:00 GMT-04:00/AST/EDT

 Reducing Supply Chain Risks – Best Practices

Sponsor: Ultriva
2010-Sep-16

14:00 GMT-04:00/AST/EDT

 VCF Compliance Clearinghouse Training Webinar

Sponsor: VCF Compliance Clearinghouse
2010-Sep-17

10:00 GMT-07:00/MST/PDT

 Utilizing Available Channels

Sponsor: Relationship Economics
2010-Sep-17

12:00 GMT-05:00/CDT/EST

 TCO has Failed! Value Maximization is the “Next” Practice

Sponsor: The Mpower Group

They are all readily searchable from the comprehensive Site-Search page.

Intengo – Doing the e-Sourcing Tango in Turkey

Intengo is a relatively new provider of e-Sourcing/e-Negotiation solutions that first appeared on the scene in it’s Native Turkey in 2006, after being founded in 2005. Like b-pack in France, it’s just starting to expand internationally, focussing on Europe first with translations to Spanish, French, and German (in addition to its native Turkish and new English language support) currently in the works.

Intengo provides an on-demand e-Negotiation platform built around (multi-round) e-RFX and e-Auction with a sprinkling of supplier information management (SIM) and catalog management thrown in. Their tool allows you to mix and match RFX and Auctions in successive rounds as you see fit. You can start with a baseline RFP, invite qualifying suppliers to an (English, Dutch, or Japanese) auction (with more variants in the pipeline), then return to a sealed bid RFP with the winners in a final negotiation around*1. It’s quite flexible and allows the organization to tailor the e-Negotiation event to their way of conducting negotiations.

It is extremely quick and easy to set up a new event, or “project”, in the system as the process is wizard-driven. It’s literally as easy as:

  1. define the basic informationevent name, details, manager, dates, and type
  2. define what the bidders can and cannot seecompetitors names, prices, ranks, etc.
  3. define the basic information and the ruleswhich can be from a template or custom defined
  4. define the itemswhich can be selected from the hierarchical catalog or defined on the spot
  5. select the supplierswhich can be selected from the supplier master or defined newly for the event
  6. define boundary parameters and extension rules (for auctions) min and max bid increments, reserve prices, etc.

One of the jewels of this solution is that the auction dashboard is jam-packed with information but yet designed in such a way that it doesn’t look the least bid cluttered. The buyer (and the bidders, with appropriate permissions) can see full event configuration details (starting, ending, extensions & rules, whether or not names and prices are hidden, etc.), current supplier rankings and percentage changes for each bid (in each lot), all bids for each item (with the lowest bid highlighted in green, and the changes from the last bid highlighted in yellow), the countdown clock, and a progress / trend graph. The bidder can also easily access the configuration screen through the management tab to extend the auction and the entire bid history through the bid list tab.

Other hidden jewels are the calendar view, which integrates with outlook and hot-links to all of the relevant screens in the relevant projects, item level multi-currency support, where the buyer can choose to define the currency or leave it open for the bidder to choose and where the buyer can choose to accept the default rates from the central bank or override with manual rates, smart unit support, fine grained access control for corporations or governments that need to limit who can see what, and the ability to easily do bulk updates on (filtered) lots so that a bid decrement (fixed or decrement) can be applied to all bids in the lot. (In comparison, many of the “commodity” auction tools don’t have fine-grained multi-currency control, automatic unit conversions, or such granular access control.)

And while the SIM and Catalog Management is basic, the user can define custom hierarchies and include supplier ratings, which is more than sufficient for many mid-market companies that still haven’t even touched modern e-Sourcing platforms. The major weakness, which is common to many of these platforms, is the lack of a custom report builder. There are built-in reports, and Intengo can build custom reports for any company that wants them, but no ability for a customer to build her own report. However, they do have Excel integration and a buyer can dump all of the information to Excel and construct her own reports which is a decent workaround if the user knows how to build a good template (where it’s just a matter of importing the exported data as needed).

They also have integrated messaging (and the ability to send e-mails), reasonable attachment management capabilities, and a moderately powerful administration section where a user can update the company profile, update their personal profile, define display settings, manage users, add and update templates for RFXs/Auctions/Projects, define additional units, input custom exchange rates, and modify the configuration profiles. All in all, it’s a solid tool for the mid-market, and one that they can offer at an affordable price-point as they are a SaaS solution. If you’re a mid-market company in Europe who is looking for a solid e-Negotiation platform to get started on the e-Sourcing path, you should definitely consider inviting Intengo to the table.

*1 If you take this approach, be sure to remember your auction ethics where you tell your suppliers up front that the winner of the auction doesn’t necessarily get the award as the auction will be followed by a final negotiation round with the top X suppliers. In addition, this strategy should only be employed in categories where you intend to split the award between two or more suppliers from the get go for risk mitigation.

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