Monthly Archives: November 2010

Four Principles To Keep In Mind When Thinking Like a CFO

As Bob will tell you again and again one of the keys to a successful career in Procurement (which includes a seat at the C-Suite’s table) is to speak like a CFO. But if you want to keep that seat, at some point you will have to think like a CFO or you will quickly be dismissed if your plans don’t measure up to their high expectations upon careful review.
But how do you think like a CFO when it’s often challenging enough just to speak like one? A recent article in the McKinsey Quarterly had some good advice to get you started.

According to “the CEO’s guide to corporate finance”, the following four principles will help you choose the alternatives that qualify as great financial decisions and that will win you a lot of attention in the C-suite.

  • The Core-of-Value Principle
    Value creation is a function of returns on capital and growth. Procurement should pursue projects that will generate returns in terms of productivity or cost reduction and should not ignore potentially high-return projects (such as an investment in a new, but unproven, supplier who uses a new technology) just because there is a moderate downside risk.
  • The Conservation-of-Value Principle
    Only improving cash flows will create value. Don’t pursue projects on expected ROX (ROI, ROE, etc.) metrics alone. Make sure there will also be an impact on cash-flow in a reasonable time-frame. For example, a piece of shop-floor technology that is expected to improve efficiency by a factor of 30%, reduce production costs by 15%, and generate an ROI of 5X over a 3 year life span is not worth it if it does not free up any cash flows for two years because most of the production costs are labor and labor can’t be reduced or reassigned in the short term.
  • The Expectations Treadmill Principle
    Movements in a company’s share price reflect changes in the stock market’s expectations about performance. The better the share price does, the better the company is expected to do. When the share price is increasing, the focus needs to be on projects that will support long-term growth (such as advanced data analysis systems that will allow the organization to identify cost reduction opportunities going forward).
  • The Best-Owner Principle
    No business has an inherent value in and of itself. (It has a different value to different owners or potential owners–a value based on how they manage it and what strategy they pursue.) Procurement should participate in regular cross-organization business-unit reviews and make sure it is still the best owner of each and every function under its control. If it is not the best owner of a function, the function should be reassigned or outsourced, and if it could be the best owner of a function controlled by another business unit, it should be willing to take that function over.

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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 short selection of webinars THIS WEEK that might interest you:

Date & Time Webcast
2010-Nov-16

00:00 GMT/WET

 Supply Chain Continuity: A Risk Management Imperative in a Global Economy
Sponsor: Avalution Consulting
2010-Nov-17

12:00 GMT/WET

 A New Decade for Smarter Supply Chain Management
Sponsor: Supply Chain Digest
2010-Nov-17

8:00 GMT-08:00/AKDT/PST

 Pfizer Finds the Formula to Cut both MRO Inventory and Downtime Risk
Sponsor: IHS
2010-Nov-17

14:00 GMT-05:00/CDT/EST

 7 Ways to Break the Cost Barrier of Trade Promotion Management
Sponsor: MEI
2010-Nov-18

11:30 GMT-08:00/AKDT/PST

 Yardi Procure to Pay: Featuring Yardi PAYscan and Site Stuff
Sponsor: Yardi
2010-Nov-18

13:00 GMT-05:00/CDT/EST

 Sourcing Marketing: Key Success Factors
Sponsor: Global eProcure
2010-Nov-18

14:00 GMT-05:00/CDT/EST

 Achieving Effective Inventory Management
Sponsor: Second Foundation Consulting
2010-Nov-18

13:30 GMT-05:00/CDT/EST

 Provider Score Card: 5 Common Sense Tests to Foster Competition
Sponsor: Health Decisions Inc.

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

Analytics VI: Conclusion

Today’s post is by Eric Strovink of BIQ.

I’ve suggested previously in this series that analysis doesn’t have to be done by an applied mathematician; the key is to get insights about data. Sometimes those insights do require rigorous statistical analysis or modeling, to be sure. Much more often, though, one simply needs to examine the laundry, and the dirty socks stand out without any mathematical legerdemain.

Examining the laundry requires data manipulation. This usually takes the form of data warehousing, i.e. classic database management technology, extended in the case of transactional data to OLAP (“Online Analytical Processing”), SQL and or MDX, and reporting languages and tools. Problem is, business data analysts typically have insufficient IT skills to wield these tools effectively; and when they do have the skill, they seldom have the time. Thus, ad hoc analysis of data remains largely aspirational.

Custom data warehouses have value for organizations. ERP systems are a good example. But the data warehouse is a dangerous partner. It is not the source of all wisdom. It cannot possibly contain all the useful data in the enterprise. Warehouse vendors have trouble admitting this. For example, for years ERP sales types claimed that all spending was already tracked and controlled by the ERP system, so there was no need for a specialized third-party “spend analysis” system. These days all the major ERP vendors offer bolt-on spend analysis.

Spend analysis has the same issue. It introduces another static data warehouse, an OLAP data warehouse, along with data mapping tools that are typically not provided to the end user. As above, the data warehouse is a dangerous partner. It is not the source of all wisdom. It cannot possibly contain all the useful spend data in the enterprise. Spend analysis is not just A/P analysis; it can’t be done with just one dataset; and it’s not a set of static reports.

Once an opportunity is identified, more analysis is required to decide how to award business optimally. The Holy Grail of sourcing optimization has been a tool that is approachable for business users; but this goal has proved to be elusive. The good news is that “guided optimization” is now available from multiple vendors at reasonable price points. Although optimists (mostly experts at optimization) have argued for several years now that optimization is easy enough for end users without guidance, I take the practical view that it doesn’t really matter whether that’s true or not. As long as optimization is available at a reasonable price, whether it has a services component or not, the savings it delivers are worthwhile.

By no means is this series an exhaustive review of data analysis. For example, interesting technical advances such as Predictive Model Markup Language (PMML) are enabling predictive analytics to be bundled into everyday business processes. Scenario analysis is also a powerful tool for painting a picture of potential futures based on changes in behavior. But the vendors of these technologies either must make them accessible to end users, or offer affordable services around them. Otherwise they will remain exotic and inaccessible.

The bottom line is that analysis tools must be accessible to end users. It must be easy and fast to build datasets and gain insight from them. Optimization software should automatically perform sensitivity analysis for you, as the doctor has advocated. Ad hoc analysis should be the rule, not the exception. Analysis should not require vendor or IT support; if it does, it likely won’t happen.

The more you look, the more savings you will find; and when you walk into the CFO’s office waving a check, you will get attention as well as the resources to find even more.

Previous: Analytics V: Spend “Analysis”

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Is it Green, or Just More Greenwashing?

Terrachoice recently released its annual “Sins of Greenwashing” study and the results are, unfortunately, not surprising to anyone familiar with the reality of today’s green marketing. According to the study, 95% of the 5,296 products that were reviewed are still making some kind of green claim are still committing at least one greenwashing sin.

And some of the sins are getting worse. 70% of products offer no proof of their claims and over 30% include a label that looks like a third party certification, but isn’t. In other words, in an attempt to part you from your green, some marketers are making up green claims. It’s appalling.

So how do you spot a fake? You can brush up on your Greenwash Guides, such as the one put out by Ogilvy Earth, or you can remember this one simple rule of thumb that, while not always true, is a good start: if it’s green, it costs less green.

Think about it. A product that is produced through a green manufacturing process uses less water, less power, and/or less non-renewable/non-recyclable raw material. Water costs money. Power costs money. And non-renewable/non-recyclable materials cost more in the long run than renewable/recyclable materials. So if it’s truly green, it was made green, and cost the company less to make than non-green products using non-green methods. So you shouldn’t be paying a premium.

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The Best Supply Chain Ideas for a Greener Planet

SupplyChainBrain recently ran a good article on Ten Steps to Optimizing Your Supply Chain for a Greener Planet that had ten (10) great ideas for making your supply chain more sustainable. However, the following ideas, sometimes overlooked, are the ones that will really green your supply chain.

  • Demand-Driven Production

    If you really want to be planet-friendly, the first thing you have to do is stop producing excessive amounts of waste — and if you’re wasting valuable resources to produce product that ends up in the trash, that’s end-to-end waste.

  • Network Planning

    Worry about how you are going to get your product or service to your customer before you start production, not after. Then you’ll realize that it’s not necessarily cheaper or better to produce your product halfway across the world and then ship it by air. And you’ll realize that it’s not always easy to find the right carrier at the last minute. If the only carrier available to truck your product at the last minute is one that uses lanes through a central distribution centre (DC) half-way across the country, that’s not green.

  • Quality Improvement

    If you shift from low-cost to high-quality, and produce items that last for decades or years, instead of years or months, you reduce the amount of waste going to landfills every year. And it is possible, even in consumer electronics where better models come out every year and everyone feels the urge to upgrade. There’s no reason you can’t build to upgrade. Instead of building one integrated device, build a device modular so that an end consumer can easily plug and play a new memory module, processor, or battery — and settle on uniform form factors so that these plug and play modules can be recycled into lower end products that can still serve a functional use, especially in schools or developing nations. Product life spans can be tripled. And, if possible, shift unnecessary processing power “to the cloud” so that a thin client device can be used for decades. Oracle gets this. The Sun Ray III is expected to last 25 years!

  • Preventative Maintenance

    If you use predictive modelling and regular inspections and repair faulty parts before they cause a breakdown, your equipment will often last much longer, at a lower lifetime Total Cost of Ownership! This is as true of personal electronics (if a fan dies in your dual-fan laptop, replace it before the other dies and your core overheats and takes your machine with it) as it is of production line equipment.

  • Integrated Planning

    If everyone is on the same page, it’s more likely that your attempts to reduce waste will succeed. Otherwise, if you make a decision that doesn’t sit well with another department, and order a “wrong” part, you might end up wasting an entire shipment when the other department reorders the “right” part.

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