Monthly Archives: June 2011

What Impact Will a 9% Drop in Profits Have On Your Organization?

Unless your Supply Management organization takes it to the next level, your company is facing a 9% drop in corporate profits this year due to rising prices and other inflationary pressure according to a recent Hackett Group study. For a typical Global 1000 company with 27.8 billion in revenue, Hackett’s study estimated that commodity and offshore labor inflation will drive a 150 million per year hit to the bottom line. Ouch!

Why? While most companies are now able to effectively anticipate commodity price increases, more than 60% of companies surveyed by Hackett in the recent study have not been successful at mitigating these cost increases. The reality is that few executives have experienced significant inflation, which is now at levels not seen in 30 years (when inflation rates hovered around 13% back in 1981).

And while inflation may not yet be at 13%, it is bad. Not only do respondents to the Hackett study expect the rate of inflation for commodities overall to rise by more than 30%, to 6.3% a year, but commodity price volatility has increased nearly 60% since before the recession. Making matters worse, at the same time, due to the talent crunch, the rate for internal labor is expected to more than triple from 0.7% to 2.2% and the rate of inflation for external labor is expected to more than double from 1.2% to 3%.

The problem, as identified by the Hackett study, is that most companies tend to take a fragmented, siloed approach to anticipating and mitigating costs. And while more advanced companies will forecast prices and do some basic hedging by adjusting contract length, purchase volumes, or inventory levels, few take the cross-functional approach required to combat the mitigation. The majority of companies do not do the analysis required to understand the impact of commodity cost increases on profitability, do not use specialized analytics to anticipate future commodity costs, and do not provide clear direction and policy for making hedging decisions. A future post will explore in greater detail some of the options presented in Hackett’s study on Taming the Inflation Dragon and why your organization must adopt more advanced

Mintec – Data for the Masses from the Masses

Regular readers of SI will know the importance of good should-cost modeling (which is also great for negotiations) as well as good market intelligence (which has dimensions and is valuable in a down economy) in cost reduction and avoidance. And while both should-cost modelling and market intelligence have a number of critical requirements that must be met for success, they both have one key requirement in common — good data. But where do you get good data? Certainly not from supplier bids! A new supplier is going to bid what it thinks it can get, not what the actual price is. Market indices from governments and professional associations? Better, but they will typically be at least a month or so behind. Trade associations that track and monitor prices on a daily basis or stock markets that trade the commodity? Great — but do you have the IT skills to integrate the feeds? And are you going to do it for the dozens of raw materials and commodities you need to build your should cost models?

The best place to get data en-masse is from a professional data provider that tracks and integrates all of the feeds you need into a centralized database that is updated with fresh data for the categories you need when you need it and that maintains years of historical data for analysis purposes. One such provider is Mintec. Formed back in 1982 by consultants and analysts who realized that real savings required real data, Mintec has been collecting raw material, commodity, and service price data from around the globe for almost 30 years. Used by 16 of the top 25 Global Food & Beverage & Retail companies, Mintec maintains price data for a database of 75,000 “line items” from A to Z across dozens of industries and categories. It then distills this information into custom databases for each client that contain just the line items they need, pre-processed and normalized to their defaults. (Combine this data with a great expressive-bidding optimization platform, such as that provided by BravoSolution or Trade Extensions and you have cost avoidance engine that can’t be beat!)

To help their clients understand the data, Mintec provides a data analysis package, called Datagain, which can be used to import, graph, analyze, and compare different line items (such as the petrol price in the UK and the petrol price in Australia, normalized to US dollars). A user can graph any set of series, against any frequency, using any (currency and unit) converions, for any date range she chooses. She can also normalize or index this data using a custom formula, factor in seasonality, and plot trends. She can also break the series down across two or four graphs and/or plot specific subseries, against different projections, to see how the price might trend over time under different assumptions. The normalization / indexing equations can use all of the standard algebraic operators and be defined over any set of variables, including user defined variables, that the user chooses.

If the user is not sophisticated at trend analysis, or does not want to do it, Mintec also offers Benchmarking and Market (Intelligence) Report services that do a deep dive into a particular raw material, commodity, or service that discuss recent, current, and projected pricing subject to the state of the market and the dominant factors at play. These, by request, reports complement the monthly market reports and commodity fact sheets that track the major commodities and markets and their relative month-over-month changes for buyers who want to look at the bigger picture. If the user wants to learn more about Datagain, analysis, and should-cost modeling, Mintec also provides on-demand out-of-the-box and customized training sessions as well as quarterly newsletters and occasional articles.

It’s a huge amount of data, that comes at a very low price point. Most customers pay less than 100K £s for access to the data they need, when they need it, updated as often as they like. Moreover, medium-sized business can get basic access (to the datafeeds) and access to the desktop Datagain tool for as little as 10K £s a year. Large enterprises will probably want the on-line hosted applet version (at the higher price-point) that runs through the browser on a hosted database that is accessible anywhere, anytime, and always up to date. While it is more expensive, it’s still cheap compared to what the organization will be paying for their ERP solution (and much more valuable from a cost avoidance perspective).

TMS Requires 100 Million, Does ERP Require 1 Billion?

A recent article over on Logistics Management that put[s] the spotlight on ERP had a great quote from
Ben Pivar, Vice President and North American Supply Chain Lead for Capgemini regarding Transportation Management Systems (TMS) Pivar says that the economics of installing a TMS package on a client server, for example, doesn’t really work until you have nearly $100 million in freight spend and that’s why on-demand is so popular in that space.

SI has to agree. Unless a firm has tens of millions in freight spend, the costs of installation, maintenance, and usage tend to dwarf the benefits of using a TMS system. However, what’s even more important to note is that enterprise ERP (from a top vendor) is, on average, at least five, if not (usually) ten times, more expensive to install, integrate, maintain, and use than TMS. This would seem to indicate that the economics of traditional ERP don’t make sense unless your company has 1 Billion in spend, or at least 1 Billion in revenue. In other words, unless you’re a member of the Fortune 2000 or Global 3000, traditional end-to-end on-premise enterprise ERP is probably not for you. And it would appear that Oracle, one of the largest players, tends to agree. Why do you think it has advertisements stating it has 98% of the Fortune 500? It’s not just because the Fortune X, it’s target market, provide it with its biggest deals. It’s because Oracle also understands that unless a company has reached a critical mass, given the cost of the system, the company won’t get the advertised return (which is a key to keeping the company as a high-paying customer year after year).

However, every organization needs a good transaction store and data repository as analysis is key to supply management success. So what does this mean if you’re not one of the lucky ones? Don’t look at a a tradtional on-premise end-to-end ERP from a big boy. Look at either a newer, smaller, slimmed down offering from a smaller player, possibly based on an open-source solution (like Compiere), a suite from a provider that maintains its own transaction store, or a newer, slimmed down, SaaS offering from a traditional provider that can integrate with some BoB solutions in the cloud and offer an effective hybrid solution. Just don’t go for the billion-dollar solution, because your organization likely won’t get a return from the millions it will cost.

Trade Extensions: No Rest for the Wicked-ly Powerful – Part II

As per yesterday’s post, it’s been less than five months since we last checked in with Trade Extensions, who had traded up to a Fact Sheet User Interface and added a slew of new features, including improved RFI support, multi-dimensional rankings in e-Negotiation, Google Earth integration, new incumbent rules, and an OLAP foundation to reporting, including the implementation of a new n-way comparison report. Since then, Trade Extensions has been on a tear to add new functionality as fast as it can to make the platform not only one of the most powerful expressive bidding optimization platforms on the planet, but also one of the easiest to use — listening to its users (which include the Fortune 1000) and adding features and functions that make an average buyer’s life easier, taking usability to a whole new level yet again. And while earth-shattering technology improvements are cool, it is usability that is the ultimate key to to adoption, use, and, ultimately, cost avoidance and reduction in your sourcing organization.

Scenario Creation & Analysis

Not only are there new rules that allow partial awards to be fixed based upon existing scenarios, but the number of constraint categories has doubled. While there were only general and incumbent constraints in the past, there are now an entire category of scenario reference rules and post processing rules. With respect to scenario reference rules, not only can allocations be kept, but bids can be favoured or penalized as well. The post-processing rules are also quite useful. Allocations can automatically be rounded and allocations that don’t meet a minimum number of units can be removed (or re-assigned to the supplier who meets a minimum allocation with the lowest total cost).

Feedback Mechanisms

The buyer now has fine-grained control over what the supplier sees, and can even mix feedback types. For example, if the buyer only wants the top three suppliers to know they are top three, but suppliers four to six to know their exact rank, they can specify that specific rank starts at bidder four, and the top bidders default to “top 3”. In addition, if the supplier does not meet a minimum bid increment, which can be defined in a number of ways (including, minimum dollar or % decrease over last bid), the supplier gets a nice red error that the bid is not acceptable AND a message indicating the minimum increment required. Finally, and this is really cool, the user can define custom color-coded bid feedback fields based on dynamic formulas that now only let the user know where they rank, but how competitive their bid is (against the current bids from the competition) in English using a buyer defined scale such as “Competitive”, “Slightly Competitive”, “Not Competitive”, and “Not Acceptable”.

Plus, the buyer can now chat with users online in an integrated IM client, and immediately see who is online when they log in as it is a widget on their project management dashboard.

Odds and Ends

The “dashboards” for RFX and auction phases have also improved. The summary, bidder summary, and lot summary are now completely customizeable by the user, support custom fields, and user-defined colour codings in the rankings. In addition, there is integrated show/hide, drill-down functionality, and customizeable pop-up (bid, trend, and bidder activity) charts where a user can select one, some, or all of the rows in each report.

They have also added a basic workflow engine that allows buyers to initiate rate requests, lot requests, and allocation publishing requests of project managers / administrators when new needs arise during a project. This allows managers and supervisors to maintain control and a complete project history to be maintained. The workflow is fairly basic at the present time, but I suspect it will mature and fill out quickly given Trade Extensions’ track record of rapid application development over the past two years. (Especially since the feature is being used by a couple of very large companies.)

All and all, it’s a lot of new functionality in a short time frame that makes the tool extremely useable by an average buyer.