In 1941, Tex Avery directed a Merrie Melodies animated short starting Bugs Bunny and Cecil Turtle called Tortoise Beats Hare. A new twist on the classic tale of the Tortoise and the Hare, it had a pretty simple message buried within:
You snooze, you lose.
And that’s precisely what will happen if you fail to constantly improve your supply chain.
This is just as true in technology and services as it is in products. If you get four bids for a new technology platform and / or (integrated) services package and three are plus or minus 20% and one is 1/3 of the price, I guarantee that lowball bid is too good to be true. And if you did your homework, you’d instantly know it and disqualify it.
You buy a product or service because it’s cheaper to buy than to build or perform it in house. However, that product or service still has a cost to the vendor, in terms of manpower and resources — costs the vendor has to meet in order to deliver you a quality product or service. If the vendor doesn’t cover these costs, and make a fair profit, one of two things is going to happen — the vendor is going to go out of business trying to serve you at an unsustainable level or the vendor is going to deliver a significantly inferior product or service to stay afloat.
I’m reminding you of this because a number of companies have not only been looking for new solutions now that we’re into a slow recovery, but because a number of companies, desperate to reduce costs, have been rebidding everything under the organizational umbrella, including the supply management platform(s) and service contracts. And in doing so, many of them have been getting unbelievably low bids from a handful of vendors who are desperate to win (new) market share — and the companies are seriously considering these bids. These bids are unbelievable for a reason — they’re not real. They’re up front costs, and as soon as you sign on the dotted line, you’re going to be hit with “change fees”, “service costs”, “upgrade fees”, etc. if you want the same level of service being offered by the competition, who are all in the same ballpark at sustainable bids. Or, even worse, the vendor is just going to give you the platform or an initial spending report, and then disappear until renewal time because the cost only covers platform support, not project or customer support. Or, and this is the worst situation of all, the vendor is trying to build a new business (in a new vertical) and thinks it can use you as a marquis customer to attract new customers, who it will overcharge to make up for the loss on you. If it works, you’re in luck, but the vast majority of the time what happens is that either the vendor fails to deliver, because they didn’t understand the true success requirements or they didn’t understand how much it would cost and how long it would take to make you a success, and then shuts down the business. If you’re lucky, they just shut down the vertical and you get to keep using the platform until you can find a new vendor. If you’re, not, the whole vendor goes tits up and you’re left holding the empty bag.
The worst part is that every month, if not every week, I hear of yet another company who signs on the dotted line with one of these vendors offering “unbelievable” deals that “can’t be matched” — and, even worse, the company is one that should know better (because there are success stories that illustrate it understands many of the precepts of good supply management). Especially when it’s so easy-peasy to determine if a bid is reasonable or not.
It’s easy to determine a reasonable range for a (bundled) technology platform (and /) or service. All you have to do is build a should cost model. Let’s say you’re buying a SaaS e-Procurement platform and want regular project management support, best-practice training, and custom integration to your in-house technology platform. Then you know the vendor will have, at least, the following costs:
If the SaaS license will require 1/50th of their data centre resources, then the base overhead to support you will be 1/50th of their data centre and support team costs. If you require about 20 hours a week of account and project management support and training, then you will require half of a senior resource who has expertise in your industry and categories. If the custom integration is expected to take two man years, than you will need the equivalent of two developers on the vendor’s staff dedicated to you.
Now, if the average cost to maintain a small data centre, or rent part of a data centre, that will support 50 similar-sized enterprise clients is 3M, then you can quickly estimate that it will cost the vendor 60K (+- 10K for a margin of error) just to have you on the books, before it lifts a finger. If the senior resource required to support you on your projects is a 120K to 150K resource, then it will cost the vendor 60K to 75K to dedicate this resource to you half of the time. And if the average developer with the necessary skills is going for 70K to 90K, that’s another 140K to 180K that the vendor needs to outlay to support you. Then, there’s the vendor’s cost of sale, which, depending on commissions structures and expenses, is probably in the 15% to 25% range, and the need for the vendor to make a fair profit, say 10% to 15%, to keep investors happy. If you add it all up, you get:
| Cost | $ Range |
| Platform Delivery & Maintenance | 050K to 070K |
| Account & Project Management Personnel | 060K to 075K |
| Development Personnel | 140K to 180K |
| Subtotal | 250K to 325K |
| Cost of Sale | 040K to 070K |
| Profit | 025K to 050K |
| Total | 315K to 445K |
This tells you that any bids you get in and around the 315K to 445K range are reasonable, that if you get any bids that are more than 600K, the vendor either doesn’t understand what you want or is trying to rip you off (up front), and that if you get any bids less than 250K, either the vendor is planning to not support you to the level you need to be supported, the vendor is planning to make it up later with “change fees” and “service fees” when you’re locked in to a long term contract and held captive, or the vendor is looking to make a poster child out of you and take unfair advantage of the relationship (and then leave you holding the empty bag if things go south).
Regardless of why the vendor gave you the unbelievable bid, one thing is clear. If you accept it, you will get screwed.
Will reading a recent Wired article over on CNN Tech on why nobody can match the iPad’s price, I began to wonder if maybe it was time for multinationals to start vertically integrating their supply chains again. Now that the perfect storm of cost, supply risk, and market turbulence has hit, it would appear that the outsourcing and right-sizing craze of the nineties and early noughts has revealed its dark underbelly. The shiny paint of internal cost reduction has cracked and pealed and all the hidden costs associated with logistics, delays and stock-outs, and lack of buying power on the part of your suppliers are now exposed.
The article, which notes that none of Apple’s competitors can meet the $500 that it asks for an entry level 16 GB wi-fi iPad, notes that Apple is able to achieve this feat for two reasons:
This results in a company that is able to not only able to use a vast ecosystem to design, build, and sell its products, but that is able to control that ecosystem as the last company in our industry that creates the whole widget (Steve Jobs).
Makes you wonder if its time to integrate those key pieces of the supply chain that you spun out over the last two decades because some consulting organization, looking for an excuse to further drain your bank account, convinced you it was a good idea. Or at least take a significant (share-based) interest in a few key suppliers so that you can guide them towards a successful path and, when it makes sense, buy raw materials on their behalf.
In our last post we presented an example of how a leading technology company, namely Apple, probably used a variation of the Value Focussed Supply Strategy when they decided to enter the smartphone market with the iPhone and illustrated, with a few liberties, how the VFS process could have led them to that market and that product and the success that followed. In this post we are going to elaborate on the process that was described in CAPS recent report on Linking Supply to Competitive Business Strategies.
Given the following seven-step process that we outlined in our last post:
We can identify the following key questions for each step:
The answers to these questions will dictate:
In our next post we will dive into some of the key questions in each category and explain some of the thought process that will help lead the organization to the right answer(s).
… and heat treating a few million pallets is going to stop the spread of insects across the Canada – United States Border. Really? No wonder the CTA takes no position on the science behind the decision to eliminate the exemption that allows wood packaging materials (WPM) crossing the Canada-US border to bypass heat treating and marking requirements — because there is no science. Insects don’t respect borders. Heat treating a few million pallets is not going to stop the spread of insects across the border. Trust me.
As per this recent article in Canadian Manufacturing, all removal of the exemption will do is disrupt border crossing because it’s going to take quite a while to individually check Three Hundred and Twenty (320) Million pallets to find the millions that don’t meet the requirement. So while it’s not necessarily a bad idea, since an insect-laden pallet could accidentally find its way to a foreign country and introduce a foreign bug to the local ecosystem that could be harmful, like the CTA says, elimination of the exemption (and subsequent enforcement) shouldn’t begin until APHIS and CFIA, working with industry, are satisfied that there are enough WPM compliant pallets in circulation to meet the demands of Canada-US trade. Otherwise, we’ll have lineups at the border from Detroit to Toronto (which is about 244 miles), and that won’t help anyone.