Monthly Archives: March 2011

Should You Manufacture That Product?

A recent article over on Industry Week that asked you to show me the money laid out six money questions that the author believes should be asked and answered before a manufacturing decision is made because a product that can’t be manufactured affordably shouldn’t be manufactured at all. As a supply chain professional, it’s your job to ask, and answer, these questions even if product development doesn’t, and even if the product can’t be cut, your job to figure out if it’s cheaper to build in house or outsource.

So, what are the key questions that should be answered?

  • How much will the total project cost?
  • How many products will be sold in a year? and
  • How many years will it take to get your investment back if you manufacture in house?

If the ROI will take years because an investment in new technology is needed, then, even if outsourcing adds cost, it might be the right idea.

For more insights, including the questions to asks (and calculations to do) if you’re trying to decide whether or not to manufacture a product in the first place, see the article.

Is There Any Room In The Space for an E-CHAOS Vendor?

When it comes to openness, there are three primary types of vendors. There are the self-promoters that openly talk about their capabilities with pride, with confidence that they are, at least in one way, the best at what they do and that some customers will see that value and buy from them. There are the modest types that don’t talk much, but don’t hide when you ask questions. Then there are those that try to hide behind proprietary technologies and processes, aging patents, and trade secrets, often knowing that what they have is not even as good as the company down the street, that the patents are outdated and reaching end of life, or that the trade secrets have been public knowledge for years.

However, because this third group hasn’t been innovating (as fast as their peers), have a large (and expensive) Sales & Marketing organization, have high manufacturing costs (because they haven’t upgraded facilities or capabilities), are top heavy (with too many chiefs and not enough tribal members), and/or have high-shareholder expectations, they have to do something to maintain their revenue stream and/or profit margin, and since openly flaunting what they have won’t do the trick (on its own), they have to hide behind patents, proprietary technologies, and trade secrets, even if the latter turn out to be nothing more than a lot of hot air in the end. (For example, there are still spend analysis vendors today trying to sell their mapping algorithm with its “secret sauce“, when the “secret sauce” has been publicly known for two decades.)

I call this third group of vendors E-CHAOS vendors because, in my mind, they bring chaos and confusion to what would be an otherwise orderly and well understood space, and usually attempt to do so with heavy use of the electronic medium (because it’s cheap and reaches a wide audience quickly) that includes copius amounts of press releases, extensive media coveage of those press releases, and regular self-serving webinars.

And I personally don’t think there’s any room for these vendors anymore. Thanks to the recession and jobless recovery we’re overworked and stressed to the max, especially since we have to increase productivity by 2.3% year after year or fall (further) behind on the global stage. As a result, as far as I’m concerned, we don’t have time for vendors who hide behind smoke and mirrors and won’t put their money where their mouth is when its time to step up to the plate — especially if they expect you to spend seven figures on a solution. And, as far as I’m concerned, just giving you a demo doesn’t count. First of all, you’re not the expert. You don’t know what to look for, what to ask, or when you should insist the vendor go off script. Heck, for all you know, it could be a video of fine-tuned “in-development” functionality that never makes the final cut (because that was the only example where it worked). Secondly, you don’t know what you need to see to make apples to apples comparisons. (And while you can compare apples to oranges, the comparison isn’t that meaningful, and only possible if you have a lot of time and the right analytics expertise on your team, which you probably don’t.)

And, most important, why should you put up with this when for every vendor that tries to hide behind closed doors, when an analyst or blogger tries to put them under public scrutiny, there are dozens who’ll gladly welcome anyone into their glass atrium with open arms? You shouldn’t! If you can’t go to your favorite analyst or blogger and get an objective third-party review of a solution that is going to cost you an investment of six or seven figures, and you have other options, the first thing you should do is strike that solution from your list because you can’t afford to not know what the vendor is trying to hide. Maybe all the vendor is trying to hide is a bloated organizational structure with too many chiefs and sales people which requires a high revenue stream, and, thus, a high sale price, to maintain and that’s okay if the vendor can deliver value appropriate to the purchase cost (because it’s fine to spend 1M to save 10M as no one’s going to argue with that ROI), but what if the solution is missing a fundamental capability and you don’t discover that fact until integration time?

Thus, from now on, not only will SI not cover any solution from an E-CHAOS vendor, include such a vendor on any potential solution lists, public or private, or make any further attempts to reach out to these vendors (since SI has had an open policy since day one and has NEVER refused a demo request that follows the rules), but it will also not cover any vendor in the modest category (or the open category if such vendor snubs SI, because then the vendor isn’t truly open in SI’s view), include such a vendor on potential solution lists, or make any further attempts to reach out to that vendor if the vendor won’t give SI a demo. Because, frankly, without a demo, there’s really no way to tell the difference between a modest vendor and an E-CHAOS vendor.

And, as per yesterday’s post (where I mentioned I would not be reviewing the vendors in the Forrester Wave in detail because too many fall into the small group of vendors that have refused SI a demo), this means that SI will no longer be including the following vendors in its recommendations or covering their solutions until such time as they change their minds and give SI a demo (because even though SI honestly believes these vendors have good solutions, belief is not enough — you need proof):

Oracle*2 (Sourcing/Procurement) and

If you really want coverage of the first four, you can go to SpendMatters, as long as you don’t expect much more than a services / business analysis for some of them (because that’s all I’ve seen in the past). For the last two, you can try the Enterprise Irregulars. While Oracle and SAP are finicky with whom they’ll open up to, they will open up to a few bloggers. But, until these guys open up more, just don’t look here.

*1 Yes, CombineNet recieved some fairly extensive coverage a few years ago, but that was when a different regime was in charge.
*2 Oracle is a top commercial database in my mind, and the doctor‘s generally preferred ERP solution, but Oracle is off the sourcing/procurement list until I get more than a white-paper to base a recommendation on.

Procurement Is Worth IT

So listen to the CPO Agenda when it says that Procurement Professionals should get bonuses, even though it might make this recommendation for the wrong reasons.

If Sales gets bonuses for making a sale, which brings the organization X cents to the bottom line for every dollar sold, then Procurement, which brings the organization 5X to 20X cents to the bottom line for every X dollars saved should definitely be in line for a bonus.

Plus, as the CPO Agenda suggests, if fixed costs are still a problem from a (short-sighted) organizational viewpoint, performance-based bonuses should be much less of a problem, especially if they are based on cost avoidance or savings, as a CFO can’t argue with numbers that improve the bottom-line 10X as much as the same numbers from Sales improve the bottom line.

Plus, if you want to retain talent, this is the best way to do it. Just like a hedge fund manager jumps to the investment house that will give him the biggest reward, your stars are going to jump to the organizations which give them the biggest rewards. And as much as you’d like to think that work-life balance, empowerment, and sustainability are important to your team, in general, nothing compares to a bigger paycheck which gives your star the ability to control their own work-life balance, a feeling of empowerment, and the ability to financially support their own sustainability goals.

So give your stars performance-based bonuses. They’re worth it.

The Forrester Wave: The Tsunami that Wasn’t

In yesterday’s post, we noted that the latest Forrester Wave on eProcurement Solutions has been released and that Jason was right when he said the Forrester ranking methodology, generally, does a better job than Gartner because it provides better transparency into the criteria that contribute to a ranking on each axis, but that, overall, the report wasn’t much better for a few, very significant, reasons.

First of all, limiting the evaluation to vendors with more than $15 Million in revenue is unduly restrictive. While it’s critical that the vendor have a steady income stream to maintain stability, a specialist vendor focused solely on best-of-breed e-Procurement solutions can be quite stable around the 5 Million mark. e-Procurement, like e-RFx and e-Auction, is a mature technology that’s not rocket science. As a result, a specialist provider with real talent in the R&D organization can easily maintain and continue to enhance such a solution on a regular basis with only 1 to 1.5 M in the R&D budget.*1 And since a small provider without a lot of sales & management, operational, and executive overhead can devote 30% or more of revenues to R&D, it’s easy to see that 5M makes a very sustainable company.

I realize that lowering the threshold would have entailed a lot more work, and probably doubled the number of vendors, because then Forrester would probably have had to look at b-pack, Conexa, Coupa, Esize, Global eProcure, Intenda, iValua, Ketera, Proactis, PurchasingNet, Puridiom, Verian, and / or WaxDigital. But would that have been so bad? Especially when CapGemini and Hubwoo, which are just extensions of an underlying SAP platform, were included?

Secondly, while product strategy is important to consider in an evaluation (is this an end-of-life product or a product that is just hitting it’s stride with years of improvements planned), strategy does not deserve a 50% weighting. If a company is going to acquire a solution, it has to solve the problems the company has today, not solve those problems in two years time. Furthermore, while financial resources to pursue the strategy are also important, if the list is limited to companies with a sufficient revenue stream, it has no place in the weighting since all companies make the cut. And as for corporate strategy, that will be reflected in the product strategy. Plus, with respect to the “current offering criteria”, where’s the “integration” criteria? Remember, its Sourcing and Procurement. Thus, while supplier connectivity and enablement is important, so is integration with the sourcing suite and the underlying ERP (that holds the organization’s data store, if there is one).

Third, procurement isn’t the problem, it’s compliance! It’s getting the big maverick spenders under control and forcing them to buy on contract (unless there is a real, management approved, need to go off contract) and forcing the suppliers to only deliver contracted merchandise and to bill for it at contracted rates. This is why most organizations only see roughly half of negotiated savings — mavericks buy off contract and they don’t catch the unapproved supplier substitutions and overbillings. Both require a good settlement function with advanced reconciliation and m-way matching capabilities. In the first case, invoices from contracted suppliers without POs have to be caught and denied (since the contracts will state no invoices without POs will be paid) and in the latter, matches have to be done against the PO and contract. However, “settlement” only gets a 1.5% weighting in the Forrester evaluation! In comparison, (future) product strategy gets a 30% weighting and goods purchasing, which an application has to have to be considered eProcurement, gets a 10%.

But, as I noted in my last point, at least this report had some good points. For better or worse, it defined inclusion and evaluation criteria and stuck with them. No vendors slipping in or out on analyst exceptions or technicalities. It displayed an understanding of what maverick spend is and why e-Procurement is needed to counter it, even if it didn’t capture and weight the appropriate functionalities. It noted that the right process must be easier than the rogue one and that approvals must be rapid when the right decision is made. It understands that while suites are getting better, there is still lots of edge left for best-of-breed to capitalize on. And it provides its evaluation spreadsheet to its clients who can alter the weightings to see which subset of the solutions are more appropriate to it based on the Forrester criteria. (You might still end up with a foot in the grave if you select one of these solutions, especially if you’re not a 1000 lb gorilla, but at least you can choose your own grave!)

Conclusion: Unlike many analyst reports, it’s definitely worth a read, but I wouldn’t base a decision on it unless you’re a 1000 lb Gorilla who is limited to buying from a 800 lb Gorilla by corporate mandate. An average mid-market company IS NOT likely to find the right solution for it in the evaluated vendor mix.

Finally, for those of you who have decided that you are going to limit your eProcurement selection to one of these gorillas, I’d watch for Jason’s forthcoming vendor analysis. SI will not be doing any further analysis on this report. Given that it missed the majority of solutions appropriate to the mid-market with its ultra-restrictive inclusion requirement and that a number of these vendors are in the very small set of vendors who won’t talk to SI, it’s not worth it.

*1 There are some “micro” companies in the space that I follow that work magic on a yearly basis on an R&D budget that never tops 1M.

Social Networks Will Change Product Innovation

But not always for the better.

A recent post over on the HBR blogs declared that social networks will change product innovation because the new communication channels [will] actually force material changes not just in the way companies market their products but in the strategies and operations they use to develop and build those products.

This will happen because it is very difficult and costly to maintain a unified voice across all channels and to control information flows to the outside world. As a result, companies will need to adust to a 24/7 dialogue with consumers, investors, and other stakeholders.

This, in turn, will require changes in product strategy since the focus will have to be on products that will cut through the noise on the channels the consumers, investors, and other stakeholders are on.

But since products take money, development will be steered towards what developers think investors will want, which will, in turn, be driven by what investors say on the channels the company is following. But just like not all investors are fans of social media (even though most of the tech investors seem to be these days), not all investos are users of social media, so development is going to be steered towards the interests of a sub-group of potential investors who are regular users of social media. And if these investors are not in the target market of the product, who knows if the target market will be served at all.

For example, let’s say the target market is the average joe who makes 40K a year in a blue-collar job. This is not your aveage investor, who’s rich and able to drop 10 times that on an investment on a whim. Thus, they’re not going to be a buyer and should not be driving your development decisions, especially if their preferences add cost as a bule collar Joe making 40K a year doesn’t have a large disposable income after paying the mortgage, the bills, and feeding the family. So while the investor might like to see the intelligent toaster made out of titanium, the average Joe would be happier with more affordable aluminum.

So, at least for now, social networks aren’t the silver bullet that will change product innovation for the better.