Monthly Archives: September 2010

Working Capital Improvement: What the “Smart Kids” Do

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.

Analyzing data from CFO Magazine’s “Working Capital Scorecard” (Part I and Part II), and reviewing case studies around the web as well as several interviews, reveals several themes, or habits, common to top performers. Perhaps the most compelling is a holistic view of the business process, change management and technologies deployed.

Business Process

Organizations can simplify the “bookends” of their enterprise business processes and focus on the order-to-cash (DSO — days sales outstanding) and source-to-settle (DPO — days payables outstanding; includes the procure-to-pay) processes. Simply put, focus on your customer processes and your supplier processes to improve these metrics. For DIO (days inventory outstanding), certainly internal processes need to be reviewed (for some enterprises, the manufacturing/production process). However, each external process connects into the manufacturing process, therefore, once optimizing each process has been successful, then organizations can optimize joint processes for further efficiencies. An example of optimizing joint business processes can be connecting your customers to your inventory, thus enabling faster moving inventory, and reducing the need for DIO. Similarly, on the supply-side, provide your suppliers visibility into your inventory and manufacturing requirements and enable the suppliers to replenish the inventory based on services levels.

Change Management

Some organizations are basing performance bonuses on working capital improvement, thus tying personal income to this specific business metric — a smart strategy. Organizations need to continue to think smarter. In several successful working capital initiatives, the sweeping organizational change is making the team pro-active vs. reactive. On the customer side, for example, some organizations (poor performers) do not realize a customer invoice is late until it is past due. By the time the collections team is aware of a specific delay in payment, they are too late — this payment from the customer may not happen for another 60 days. This can be referred to be as a reactive process. Organizations at the top-levels of working capital performance improve DSO by reviewing invoices prior to sending them to the customer. The review goes beyond just formatting and syntax to determine if the invoice matches a customer’s purchase order. In the event the invoice does not match, the collections team is notified and corrective action can be taken before the customer sees the error. By viewing collections within the order-to-cash process as a proactive process, successful enterprises transform the collections team and thus reduce time-to-receipt (payment).

Leverage various technologies

Technology can be double-edged sword. If an enterprise automates the process of manually generating invoices, and the invoices are incorrect 10% of the time, then automating causes the error to happen much faster. Key sets of technologies to leverage are a combination of automation, business process management (BPM) and a workflow-based system. Automation can come in numerous forms from a variety of vendors — from infrastructure providers, B2B integration providers, and providers of e-procurement and e-invoicing solutions to automate the various processes affecting DPO/DSO. Some of these technologies also support varying degrees of BPM, or a stand-alone BPM technology may be deployed, depending on the level of analysis required to analyze any information sent to customers/suppliers. Once such analysis is complete, the workflow-based system can be utilized to route any potential issues to proper personal within the organization.

Conclusion

The high performers in working capital, as measured by days working capital (DWC), improve the DWC by being pro-active vs. re-active in the various business processes which can directly impact this metric and it’s sub-metrics (DPO/DIO/DSO). However, the improvement is not accomplished by just addressing a single facet — process, technology or people, the improvement occurs by addresses all three facets simultaneously. Addressing all three facets enables the proactive management of the business processes, which contribute to improvement of working capital.

Thanks, Sudy.

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The Strategic Sourcing Debate, Part II (Who’s Right)

In Part I, we noted how Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest last month by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. This was quickly picked up across the supply management blog-sphere and resulted in powerful reactions from a number of prominent bloggers, including most of the heavyweights.

So who is right? Did Jason Busch (of Spend Matters) get it right when he insisted that “Strategic Sourcing Ain’t Dead, Regardless of What the Naysayers Suggest?” How about Robert A. Rudzki (of Greybeard Advisors and author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise) who focussed on “Returning the “Strategic” to Strategic Sourcing” (on Spend Matters)? Or Tim Cummins’ (who leads the IACCM) who lamented The Death Of Procurement: Nightmare or Nirvana?Then there was Steve Hall (of the Procurement Leaders Blog) who lamented on the “Rumours of the Death of Strategic Sourcing”, Dave Henshall (of Purchasing Practice) who addressed Procurement 2.0 – and Other Labels, Josh Dials (of Iasta) who said it’s time to ‘Put “Strategic” Back into your Strategic Sourcing’ (on eSourcing Forum), Joe Payne (of Source One Management Services) who shouted that “Strategic Sourcing Lives On!” (on the Strategic Sourceror),  and William Dorn (of Source One Management Services) who ranted that “Strategic Sourcing is Alive and Kicking”.

Only one person got it right. It wasn’t the Spend Matters prophet, Jason, the Greybeard Advisor, Bob, or the global contracting king, Tim. It wasn’t practice leaders Dave Henshall, William Dorn, or Dalip Raheja. It wasn’t Iasta’s newest blogger, Josh Dials, and it wasn’t the Procurement Leader advocate Steve Hall either. That’s right, it was:

Joe Payne. Source One’s Director of Strategic Sourcing, the cub among the lions, who rarely speaks up (and posts maybe twice a month) was the only who got it right. While everyone was arguing alive-vs-dead, cost-vs-value, fixed-vs-variable, etc. Joe was the only one who hit the nail on the head with his hammer by pointing out the one key fact that makes the whole debate moot:

At most companies, the concept of strategic sourcing hasn’t even been born yet. As Geoffrey Moore would say, strategic sourcing has yet to cross the chasm. This is true not only in the mid-market, which has just started to tune into sourcing and e-Sourcing, but, as Joe points out, at a large number of Billion-dollar multi-nationals as well. Even today, in 2010, strategic sourcing is still only being used at the leaders and innovators, which is never more than 20% of the market, and often not more than 10%. (This is clarified by the fact that the vast majority of companies still don’t use true spend analysis or decision optimization, the only technologies that allow you to strategically select the categories with the largest opportunities and analyze not only the total cost, but the total value of a proposed award, and the only two technologies proven to deliver double-digit returns, on average, every time they are used, with 11% for true spend analysis and 12% for decision optimization.)

This isn’t to say that the other contestants, and the heavyweights in particular, didn’t make some good points, as most of them did, but that many of them missed the key point. (Furthermore, just about everyone got something wrong too.) An idea can’t die before it’s born, and while you can argue that the continual evolution that is required as the organization gains maturity implies a continual death of ideas (until the original idea is barely recognizable), it also implies a continual rebirth of ideas.

So how did the other contestants fare?

I’ll let you know in Part III.

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Should the Force(.com) be With You?

These days, it seems that everyone wants a piece of the Force. I’m not sure why. Maybe they think that they’ll be able to jump 20 feet high, survive a thousand meter fall, and move spaceships with their minds. Who Knows? All I know is that vendor after vendor in the e-Procurement space are following the lead of vendors such as Coupa, SupplierSoft, and CVM Solutions and (re)building their application on Force.com.

And I’m not sure it’s the right thing to do. First of all, as I’ve told you many times, the cloud is not a fluffy magic box. It’s just another delivery model, with it’s own advantages and disadvantages (and the biggest disadvantage being that you have zero control over performance).

Secondly, the convenience of having all of your applications and data in one place is just as convenient from a hacker’s point of view as it is from yours — especially if his primary line of employment is corporate espionage. One weakness in the security layer and BAM! … all of your data belongs to him. Plus, he doesn’t even have to social engineer an account from your users to social engineer legitimate platform access … if there’s a weakness in the data access protocols, any account from any customer will do.

Thirdly, what happens when the whole thing goes down, as it recently did for the Virginia Department of Motor Vehicles when “a breakdown in the data storage system” (Boston.com) caused them to go offline for days? If the black swan sinks his teeth into the Force, and takes down a primary data center, do you really think there’s enough spare capacity in the system for them to failover without interruption and data loss? And even if they do, will performance be tolerable?

I’m not saying that your vendor shouldn’t do it, or that you shouldn’t do it either, but that you should think about it. Remember, there are two sides to the force — and if you forget about the dark side, you won’t be prepared when it rises up against you.

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Pre-Defined Forecasting Models — Are They Worth It?

It seems all of the inventory management and service management platforms these days are touting the myriad of forecasting models in their latest and greatest release, but are they worth it?

It’s a hard question to answer. Here are some of the main arguments from both sides of the fence. You be the judge.

Supporter: You should check out this great new software for inventory and service management (SISM) from Hyper Yard Product Engineering (HYPE). It supports time series, casual, and combined forecasting models that allows you to define forecast types, horizons, target replacement rates, smoothing constants, variance parameters, seasons and trends, target costs, target fill rates, thresholds, and a slew of other parameters. It will save your buyers a lot of time, experts and novices alike.

Detractor: I don’t know. Sounds like a bunch of hoopla to me. Not only do most “experts” believe that only their models are the right models, they are likely to be suspicious of the results unless they can tweak every parameter and analyze the assumptions and algorithm in detail. And even then, if the resulting curve doesn’t adhere to their intuition, they are likely to call it a pile of junk and override it with a manual forecast. As for novices, it’s not very useful either as they aren’t likely to have the competence necessary to understand the inputs or outputs or the reason why one method is preferable to another for a given commodity or category and will likely choose the wrong method and screw-up the parameters.

Supporter:Oh no, not hoopla at all. It’s extremely useful to both parties. It’s a great help to novices as it automatically selects the right model given the commodity or category, sets the parameters based on contract data and historical inventory patterns, and correlates to similar commodities in the system. It greatly increases the accuracy of their results. And since it provides dozens of algorithms, where each parameter and assumption can be overridden, experts will love it as it will contain their algorithm, allow them to tweak the parameters, and override results with a manually derived model where needed.

Detractor:So, the expert can override the system at any time and the novice doesn’t have to choose anything?

Supporter:Correct. An expert can even define a fully manual forecast if the situation is unusual (such as a one of a kind promotion or rapid uptick in the economy) and a novice doesn’t have to do anything.

Detractor:So, the novice gets a free ride until the black swan decides to attack and cause a major catastrophe, and the expert gets to bypass the system entirely. In the first case it’s misused, as no system can compensate for human intelligence and every forecast needs a sanity check, and in the second case it’s not used at all. Sounds like a waste of money to me.

Supporter:No, no. You miss the point. By automating the process, it gives the user time to focus on learning the category so that she can tweak the parameters when she notices an unusual uptick or downtick and so that she can focus on analyzing the forecast and performing the sanity check instead of wasting hours or days trying to manipulate formulas and software to produce the forecast. And since it has so much power, the expert won’t need to override with a manual forecast very often.

Detractor:In theory, yes, but in practice no. Human nature is what it is. Most novices are tactical procurement personnel who don’t understand the math behind forecasting and don’t want to. They’ll drive whatever forecast the system spits out until they drive off the cliff. And most experts are arrogant know-it-alls who don’t believe a dumb system can ever come close to their years of experience and massive ego. They’ll tweak or override every forecast even if there isn’t a compelling reason and even if the forecast is probably right (because only they can be right) and tweaking it makes it wrong. Both ways, the company loses. Not only does it lose the investment in the system, but it loses out when it gets stuck with excess inventory or fails to meet demand.

Supporter:Well, you have to use the system properly to take advantage of its power.

Detractor:Right. And neither party will. Furthermore, if forecasting really was a science and if these tools always worked as advertised, the world would be an easy place. But the reality is that most demand is impulse and spike driven and most forecasting is nothing more than dumb luck in the end. As a result, all those continuous and curve fitting algorithms turn out to be worthless as they can’t model spikes. The reality is that you can get as much accuracy from a kindergartener’s hand drawn curve, especially if it looks “close” to historical demand curves.

Supporter:That’s why these tools also have extensive comparative graphing capabilities that allow you to compare current forecasts against past behavior for similar horizons. You can see whether or not the forecast is in line with what normally happens and whether or not there are any spikes consistent with your expert’s “gut feeling”.

DetractorThat’s nothing more than warm fuzzies, and warm fuzzies mean nothing. It’s as useful as Wall Street’s “risk” algorithms. Heck of a lot of good they did us.

Supporter:That’s why the tools allow you to update the forecasts at any time to take into account the latest changes in demand.

DetractorSo what? Spikes are, by their very nature, unpredictable. All you can do is “smooth” the curve to the new data. An unexpected spike is an unexpected spike is an unexpected spike and you lose millions in sales because of it. Just ask Apple or Nintendo or Sony who seriously underestimated initial demand for a number of their recent products.

Supporter:Look, we both know that no tool will solve all your problems and that spikes only occur in a few categories. For example, for many consumer goods, and many consumables in particular, demand is relatively constant year after year. Some brands or models may sell a little more or less than predicted, but most categories of household goods rise steadily with the population. We’re not going to suddenly start washing our clothes twice as often, start drinking twice as much coffee a day, or buying twice as many CDs. You need to start somewhere, and a tool that’s likely to get most of it mostly right out of the box is a great time saver. Plus, the best way to detect a spike or a drop is to instantly be able to see whether or not demand is following the plan. That’s the true power of these tools.

DetractorMaybe, but if that’s the case, what do you need all the advanced modeling for? Wouldn’t a simple time series with the ability to fully define a forecast by hand be just as good?

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Maybe Coupa Should Build a Coupe

I recently gave Coupa a bit of a chastising in a recent series (Part I, Part II, and Part III) for failing to impress me with the rate of innovation ever since Dave Stephens left, as it looks like they’ve spent most of the last year developing flash (UI) and not substance (functionality).

But maybe that would be the right strategy for Coupa. Let’s look at the reality. There’s a large market out there consisting of companies (mostly mid-size, but some large and small) that have never used anything resembling a (modern) e-Sourcing or e-Procurement solution. At most of these companies, they don’t even know the difference between e-Sourcing and e-Procurement. All they know is Google and Amazon, which we all know are not the F-350’s of the B2B world.

At these companies, something that looks like an Amazon, searches like a Google, and connects like a Facebook goes over well. (After all, they’re not cricketers, and don’t know the perfect recipe for B2B canard a l’orange.) They don’t know that real e-Sourcing involves sophisticated analysis and negotiation techniques or that real e-Procurement is actually a nine-step process built around time-tested best practices to insure that the organization orders the right product at the right time in the right quantity off the right contract at the right price. They still think that ordering office suppliers and commodity electronics online is B2B e-Procurement. Forget about the fact that some of the old-time sourcing pros are claiming that strategic sourcing is dead, these companies haven’t even progressed far enough along the commerce curve to know what strategic sourcing is!

In other words, this market has no idea why it needs an F-350 work horse, and would thrilled to be getting a Chevy Cobalt. If Coupa adopts a keep-it-simple strategy, instances of their platform will sell like hot cakes, and Coupa will do great, as long as they don’t discover that there’s a major fault in the power steering five years down the road after almost one million (1M) seats have been sold.

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