Monthly Archives: March 2011

The Forrester Wave: Ocean or Kiddie-Pool?

As one of the flagship publications in the space, this is one that, for better or worse, a lot of people look forward to come decision making time. So, just like SI tackled the Gartner Quadrant last year, it’s going to tackle the latest Forrester Wave on eProcurement Solutions (Q1, 2011) to help you understand what’s good, what’s bad, and, in some cases, what’s downright ugly. Because, in the end, if you don’t know how to ride the wave, you might just end up digging your own grave.

First off, I agree with Jason (who commented that Forrester’s eProcurement Wave Captures the State of the Market) that 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, that this report in particular does a solid high-level job of creating a credible segmentation for a sub-set of the vendors in the market, and that “there was little to broadly differentiate” among providers, at least on a feature/function level for providers that were included in the report. But better is not sufficient, high-level segmentations are pretty easy, and if you limit your report to the 800lb Gorillas, all of the solutions are going to pretty much look alike.

For example:

  • if you have to get from New York to Los Angeles quickly, rail is better than car (because even though it makes lots of stops, the train runs 24 hours a day and you can’t drive 24 hours a day), but doesn’t match the efficiency of air and a direct flight
  • there are lots of ways to credibly segment vendors — product focus vs service focus, e-Procurement focus vs ERP focus, generic solution vs vertical solutions — but such segmentation is meaningless to a buyer if it doesn’t segment according to the buyer’s particular needs
  • if you limit your search to slivery mid-sized sedans, from a distance, there’s not much difference between a Toyota Camry, Ford Fusion, Nissan Altima, Honda Accord, or a Hyundia Sonata (and you’re likely to confuse them if you’re driving fast and just take a quick look)

In other words, while this was a little better than last year’s Tragic Quadrant from Gartner — where strict guidelines were set down but vendors allowed to slip in on exceptions or technicalities anyway, where some of the evaluation criteria didn’t make any sense at all, and where some non-standard definitions were used — it wasn’t much.

Basically, for just about every fundamental it correctly included, there was an accompanying flaw. And while most of the flaws weren’t that bad, the net result is that the overall report isn’t that useful unless you’re a 1000 lb Gorilla trying to figure out which 800 lb Gorilla you should buy from. And since there are only 1000 companies in the Fortune 1000 club, this means that the number of companies that will find this report useful are few and far between, and, as usual, the burgeoning middle-market, where most of the need is, goes unserved again, and the tsunami you might have been expecting is nothing more than a weak 6-foot wave that won’t do anything more than get you a little wet.

So what were the (major) flaws? That’s the subject of tomorrow’s post.

Productivity Truths

The McKinsey Quarterly recently ran a great article on five misconceptions about productivity (registration required) that is a must read for anyone thinking about not greenlighting an investment in new supply chain technology. As per the article:

  • Productivity IS a priority
    In order for the US to sustain its average historical GDP growth of 3.3% with the projected declines in labor-force growth, productivity growth needs to increase at an annual rate of 2.3% — a rate of growth not achieved since the 1960s. And since the supply chain is the dominant driver of productivity in most organizations, supply chain needs every productivity increase it can get.
  • Productivity IS a job saver
    With a continuing lack of credit and a slow sales rebound in most sectors, your average company can not afford to hire and still has a significant need to do more with less as it first has to grow with the resources it has. Productivity increases help a company keep costs under control, which reduces the chances it will need to layoff.
  • Productivity gains ALSO come from increasing value
    If a new technology will allow the company to identify value or increase value, it’s a must. For example, an analytics system that will help pinpoint key value addes across a product line, new sustainable warehouse technologies (such as hybrid vehicles), or investments in new technologies that reduce plant energy requirements, can increase profit, brand image, and/or sales.
  • Productivity IS AS important to leaders as losers
    How do you think leaders stay leaders? They continue to make gains year after year!
  • There is NO LIMIT to Productivity Gains
    McKinsey’s research estimates that three quarters of the productivity gains required by the US can be achieved simply by applying best practices across the private sector! Imagine what new technology and methodologies could do!

Hedge Your Bets

The consensus across the board seems to be that significant price volatility in the commodities and energies markets is here to stay, so you better get used to it. A recent article over on the CPO agenda on hedging your bets, which makes a great case for continued price swings of 25% or more, presented 10 strategies for managing the swings and rising prices that every buyer should be aware of. The following are particularly relevant:

  • Learn from Last Time
    Which was a mere three years ago when commodity prices reached unprecedented highs in 2008. Refresh yourself on the impact and mitigating solutions you came up with at the time. You’re going to need them again.
  • Hedge
    Get some expertise from the finance organization and hedge your bets with financial instruments. It might increase the overall cost of the buy a little, but what’s worse: adding 5% to the buy, or taking a 50% wash because you bet wrong? There is so much volatility now across so many categories it’s almost a statistical certainty that the organization is going to get burned. And if the loss could be significant, heeding is a small price to pay.
  • Acquire New Technology
    The supply management suite should contain tools that monitor current pricing trends and illustrate their effects on the company’s balance sheet. It should also contain some risk management or data analysis applications that can provide, in the hands of an expert user, guidance on strategies the organization can use to control and limit the effects of rising prices.
  • Substitute
    Are there other materials that could get the job done? Plastics and glass can be interchangeable in packaging, there are multiple choices for alloys in consumer electronics, and some food stuffs can be made with different recipes. (E.g. cow’s milk vs soy milk vs almond milk vs rice milk)
  • Seek Savings Elsewhere
    If there are no savings in direct, reconsider the organization’s needs for indirect and look for savings in the sacred cows. For example, instead of an hourly rate for legal, look at Alternate Fee Arrangements (AFAs) with fixed fees for well-defined, repeatable, cookie cutter tasks. (Leasing agreements, government filings, and discovery are well understood tasks that should only take a fixed allotment of time that could be negotiated on a fixed-cost basis.) And in marketing, maybe you take control of service spend and the agencies only get paid for creative. (Do you think an agency focussed on creative ad campaigns is negotiating the best rates on printing, production, and air-time?)

Even when prices are rising, there are still ways to reign in costs and reduce spending. You just have to get more creative.

Think Energy Efficiency Investments are Costly? Think Again!

A recent article in Industry Week on Sustaining a Green Strategy, which described Dow Chemical’s pursuits to become more energy efficient and further reduce its energy footprint another 25% by 2015, had a very telling number buried in the article. A very significant number. To some, a very shocking number.

Dow has saved 7 Billion with investments into energy efficiency. SEVEN BILLION!

Think about that while also thinking about how many deals you have to negotiate to get that kind of savings in an average Fortune 500. Considering that, on a large direct spend category, 3% is the average savings an organization will find as it negotiates the same hundred-million dollar category again and again, if the average deal size is 100 Million, that’s 2,334 negotiations to get the same savings. (Well, not exactly, as some deals will save 10%, but since other deals will only save 1% due to skyrocketing prices, it’s not far off.)

It’s true that Dow has made 2 Billion in energy efficiency investments to date, but Dow also avoided 9 Billion in energy expenditures from these investments, giving it a net savings of 7 Billion to date — with more savings accruing every day as energy prices continue to rise. And when you consider the constant demands for power from lighting, heating, cooling, and computing that a modern organization is subjected to, it doesn’t take long for an investment to pay off — and it will keep paying off year after year. So make the investment, even if you have to take out a loan to do so. The savings will pay the interest many, many times over.

For a Successful Supply Chain, Think Long Term

The HBR recently ran a great article on Creating Shared Value that quickly gets to the problem with many companies today, and, by extension, many supply chains.

Companies themselves … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success.

By failing to take into account the well-being of their customers, the depletion of vital natural resources, supplier viability, and general economic distress of the communities in which they do business, companies are thinking very short term and sacrificing long-term success for short term gains. And unless they correct their thinking, and, according to the article, focus on shared value, they will fail to build real wealth.

But when the focus is on social good, the real reasons that long-term thinking yields supply chain success become muddied. Simply put, they are:

  • Lower Operational Costs
    Reducing the need for natural resources reduces the costs associated with those resources. Long term thinking selects the solution that will reduce the need for expensive resources in the long term, even if integration costs a little more in the present.
  • Lower Material Shortage Risks
    Switching to more environmentally friendly materials and materials that are not in short supply, even if costly up front, secures supply for the long term. In contrast, depending on a rare mineral or hazardous material brings the risk that a single natural disaster or environmental regulation can take out an only source of supply.
  • Lower Risk of Market Backlash
    If your consumer base all of a sudden goes green and you’re seen as the worst offender, bye-bye sales and no supply chain will save you.

So think long term. The savings will pay for the effort many times over.