Monthly Archives: January 2012

Managing Indirect Spend: An In-Depth Review, Part I.2

In Part I.1 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last post, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to continue our review of Part One — The Process, and dive into the last three parts of Bill and Joe’s excellent adventure into the strategic sourcing process and discuss:

  • Scorecarding
  • Negotiations
  • Contracting

A Balanced Scorecard is a strategic performance management tool that tracks supplier performance against a set of metrics in order to provide a well-rounded picture of the supplier that can be used to monitor and control performance. While most organizations introduce balanced scorecards after a supplier has been selected, scorecards should also be used when determining which suppliers to invite to the table, and everything — pricing, capabilities, past performance, market intelligence, supplier responsiveness, and employee perception — should be built into the scorecard to help insure the most appropriate supplier is selected.

The chapter also makes some great points that are often overlooked:

  • Scorecarding can be a teambuilding activity
    The entire cross-functional team can contribute to the process.
  • Scorecarding fosters buy-in to the awarded supplier.
    As everyone knows that the supplier was selected only after all data and all viewpoints were carefully considered and organizational needs fully balanced.
  • Scorecarding can deliver market insights not otherwise obtainable.
    Especially when supplier references are checked as part of the process.
  • Insights only come when a full history of the relationship is obtained
    Suppliers only give you references they believe will be glowing and cast them in the best light. Thus, it is vital to ask the references what supplier interactions were like from day one, what issues were encountered, and how (effectively) they were resolved. How long before the customer reached its current level of satisfaction?
  • A lot of questions will need to be asked!
    The authors provide a starting list of sixteen on page ninety-seven, and depending on the category and its nature, this might just be the ice-breakers.

Eventually, every process results in negotiations, which are covered extensively in Chapter 6. The authors also make some great points in this chapter that cannot be forgotten:

  • Suppliers have the advantage — ALWAYS!
    Whereas a sourcing team spends 5% of its time, or less, sourcing a specific product or service, especially in an indirect spend category, the [lead] supplier negotiator is 100% focussed on selling that category of products or services every single day. They know everything about it, and the market waters around it, while the sourcing team is struggling just to tread water in the unfamiliar territory.
  • A proper negotiation strategy minimizes the chance a supplier will add extra margin in a first round bid.
    If the negotiation strategy pervades the entire process, and presents a business case to the supplier that your business is something they can’t afford to lose because they will profit immensely by gaining it, the supplier will be much more aggressive with its bidding up-front.
  • It’s Not Getting to Yes, It’s Getting to No!
    If the supplier never says no, then the sourcing team never came close to getting the supplier’s best offer.

The chapter also had some great techniques a buying team can use to improve pricing, as well as some very important things that a sourcing team should never do, which include:

  • no negotiating after a reverse auction
  • no negotiating in contracting
  • no setting artificial targets

and if it’s not clear why, then you should definitely read this chapter.

The last, and final part, of the basic process is contracting — getting it in writing. A contract should balance the need for legal protection with common sense. It should be concise and only address the relevant risks and identified resolutions. It should not be a generic — one size fits all — boilerplate MSA that is 100 pages in length where only 10 pages are really relevant. All that does is add time (for unnecessary review), cost (of the overpriced lawyers), and loss (while savings opportunities go unclaimed) to the process. With the exception of a few basic definitions, the only clauses that should be there besides negotiated terms and resolutions are a balanced force majeure clause, a right to audit clause, and, possibly, a right to first refusal clause. While the supplier should have the right to be late without penalty if an act of nature prevents it from business as usual, the buyer should have the right to seek alternate sources of supplier or terminate the contract if the supplier cannot recover in a certain amount of time and, especially in the case of software (maintenance) contracts, should NOT be required to make payments when the supplier is unable to perform. The right to audit should be for the life of the contract, the audit should be allowed to go all the way back to the start of the contract (even if four and a half years into a five year contract), and the buyer should have the right to recover all monies owed from overcharges, even if they were made four years ago.

The chapter also did a great job of explaining why:

  • legal should be brought in even before the RFP/Q to prevent issues from arising later on,
  • most favoured nations clauses, which symbolize much of what is wrong with government agencies, do nothing but bite you, and everyone else, in the @ss, and
  • continuous innovation clauses all but guarantee that there will be no innovation for the lifetime of the contract.

There’s some great advice in these pages — and more to come in Part I.3 which will discuss how to truly achieve continuous innovation, how to get stakeholder buy-in, and what not to do if the goal is success. Continue to stay tuned!

Do You Have a Chain of Custody in Your Global Logistics Operations?

If you have a significant global logistics operation, chances are that, by now, you have sophisticated tracking capabilities and can tell at any given time at least where your cargo was at one point during the last 24 hours. And this is good. But if you want to go beyond minimum import/export requirements that have emerged, and are continuing to emerge, in the US and EU, then you need more than continuous tracking and monitoring — you need chain of custody.

Chances are that, right now, you’re thinking this is nuts because “chain of custody”, thanks to CSI-like forensic cop dramas, is associated in your mind as a “police” or “forensics” requirement when a crime is being investigated and has nothing to do with your supply chain, but it’s a wrong association. And when one remembers that many of these laws were put in place to prevent terrorism and illegal goods (such as drugs), which regulators are expecting to occur in, or through, import/export operations, it starts to make sense. And it makes even more sense when one realizes that it’s (becoming) a requirement for C-TPAT, which is crucial for efficient import/export operations given the slowdowns that have resulted by all of the additional paperwork and inspections that have been added to the import/export process over the last decade.

So what is a chain of custody? It is a process that asserts:

  • the cargo is what it purports to be and in the quantity stated,
  • the cargo was in the continuous possession or control by the carrier who took charge of the cargo from the time it was loaded in the container at origin until the time it is delivered at final destination, and
  • there is evidence of the identify of each person or entity who had access to it during its movement and that the cargo remained in the same condition from the moment it was sealed in the container for transfer to the carrier who controlled possession until the moment that carrier released the cargo into the receipted custody of another.

This, in turn requires that the cargo is secured from the time it is packed, verified, and sealed at origin, as confirmed by an authorized agent, until the time it arrives at its final destination and is verified to have been secured the entire way. In addition, all information relating to the cargo, its container, its movement, the person(s) verifying and sealing the cargo, and the persons transporting it must be maintained securely in the container security control system.

This may require more work, and more certifications, but there are benefits to the shipper, consignee, carrier, and CBP, as discussed in this great article on Tracking and Chain of Custody: The Difference over on Maritime Executive Magazine. Select Benefits include the following

  • for the shipper
    • World-wide tracking and location of container for security and asset management
    • Lower insurance costs
    • Expedited entry of cargo by CBP and faster through-port time
  • for the consignee
    • Enhanced knowledge of shipper and carrier performance
    • Third-party verification of all supply chain data elements and reports
    • Increased or enhanced knowledge needed for 10+2 Program Importer Security Filings
  • for the carrier
    • Protection against claims by shippers that unauthorized contents were the results of carrier action
    • Automatic transmission to CBP of container data
    • Compliance with and protection within the new Rotterdam Rules impacting vessel carriers
  • for CBP
    • Knowledge of which containers need no inspection improving man-power efficiency
    • Elimination of third-party reporting of trade data
    • Evidentiary data for potential legal action

#9 e-Auction

Yesterday saw the release of SI’s new sponsored white-paper on the Top 10 Technologies for Supply Management Savings Today. Sponsored by BravoSolution, this new whitepaper introduces the top 10 technologies that can help a company realize the goldmine of untapped savings opportunities it is sitting on. Properly employed, these technologies could help an organization tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.

e-Auction technology, which stands for electronic reverse auction technology, is typically the second entry point for a company moving from a paper-based sourcing process to a modern technology-enabled supply management solution and an organization’s second stop to supply management savings.

The savings from e-Auction technology are essentially the same direct savings, from goods and services cost reductions, and indirect savings, from process efficiency and value generated from supply base expansion, found in RFX technology, with the major difference being the speed at which the event can be conducted.

With electronic auctions, once the sourcing manager creates the specifications and sets up the auction, including the weighting and award rules, the process drives itself. The suppliers sign on at the appropriate time and place their bids. When a time-limit or bid floor is reached, the auction ends and the award is made.

The major advantages of e-Auctions are the ability to define precise lot requirements and acceptable bid ranges, which can ensure cost reductions meet a minimal threshold; the ability to define different auction types, which can drive more competitive behaviour in the supply base if properly selected; and the extreme efficiency that can allow a large number of non-strategic or low-value categories to be brought under management

Properly applied on the right categories at the right time, e-Auctions have been generating savings for over a decade. Back in 2003, in one of the first significant studies on e-Auctions, CAPS Research found that direct cost reductions usually averaged between 10% and 20%, that cycle time reductions could be as much as 40%, and that there could be a “power shift” from strong suppliers to weaker buyers not previously attainable. One company realized 165 Million of savings on 912 Million of spend, a major service provider estimated average savings of 20% on 30 Billion of reverse auctions, and a recent report from the IBM Centre is estimating that the Federal Government could save 8.9 Billion annually through reverse auctions alone.

And this technology is only #9 on the list of the Top 10 Technologies for Supply Management Savings Today. Imagine what could be saved with the top technology, or even the third best technology. Or better yet, instead of imagining, download Top 10 Technologies for Supply Management Savings Today and find out! (Registration is required for this one but the doctor believes it’s worth it!)

Managing Indirect Spend: An In-Depth Review, Part I.1

Late last year, Joe Payne and William (Bill) Dorn of Source One released their first book on Managing Indirect Spend (Amazon) which is a culmination of everything they have learned while doing nothing but Strategic Sourcing since 1992 — before it was cool. Clocking in at 422 pages, this is an incredible resource for anyone who wants to get a handle on indirect spend, which has increased significantly since outsourcing and right-sizing rose to fame in the 1990s.

This book, which should be on the desk of everyone looking to get a handle on indirect spend, is loaded with so much information that there’s no way SI could do it justice in just a post or two — so it’s not going to even try. Just like the book is broken down into four parts, our review, over the next few weeks, will be broken down into four parts — and then into sub-parts where there is just too much to comment in with a single post.

Today we’re going to review the first part of Part One – The Process, and, specifically, the chapters that cover the first three parts of their six part process, namely:

  • Data Collection & Spend Analysis
  • Research
  • The RFx Process

We’re all familiar with the basic process, and if you are a regular reader who has downloaded the free e-book, no registration required, Spend Visibility: An Implementation Guide, then you are very familiar with the data collection and spend analysis process. However, the chapter still makes some good points that need to be reiterated, particularly in regards to building sponsorship and understanding the category. Lack of sponsorship will kill your project faster than a minnow can swim a dipper, and to get it you need the end user’s support as well as senior management. As Joe and Bill state, this will require sitting down with the users and letting them know that they are not being singled out by your spend project, that your project’s success depends on them and is their success as well, and that your project is designed to tie to their objectives (as it should be). In addition, the following is a great checklist of information you will have to review with your users before starting a serious sourcing project on the category:

  • business relationship (with current suppliers)
  • product or service utilization specifics
  • location impact
  • financial implications
  • contractual obligations
  • reports, requirements and actual utilization
  • service requirements and expectations
  • supplier ranking

Joe and Bill also provide some great advice on how to handle the three different types of responses that you will encounter when requesting data from incumbent suppliers — acceptance, avoidance, and pushback — and questions to consider during supplier interviews.

Moving on to the research phase, they provide a breakdown of the eight (8) elements that need to be researched during any sourcing initiative (that you want to be lucky) as well as some great tips for collecting market intelligence through the RFI process. While modern tools, including Source One’s own WhyAbe, make the creation of RFIs drop-dead simple, getting responses and, in particular, the responses you want can be challenging for a variety of reasons. Suppliers might not think you’re serious, might not want to expose what they consider to be sensitive data, or might not be comfortable with the tool. A carefully constructed process has to be put in place, followed, and sometimes augmented by other approaches for the research phase to be truly successful. Joe and Bill lay out their advice, garnered from almost twenty years of experience dedicated to sourcing projects, in detail and offer a blueprint for your success.

Then they jump into the full RFX process, which might consist of an RFP and / or an RFQ/RFB and dive into the typical elements of a good RFP and RFQ as well as the evaluation process that should be followed and the response that should be provided if you want your suppliers to participate in the process again. One point that they make that most other resources miss is the need to include disclosure and liability sections in the RFx document. This is critically important when inviting new, unknown, suppliers to an open event. If these suppliers aren’t awarded the business, they may sue you on the premise that the invitation for bid was in fact an invitation to do business and that the RFx constituted an MOU to be replaced by a future PO or contract once the information was provided. Slimy and shady to say the least, but this has happened. They also discuss the reverse auction process and when it is preferable to an RFX. Finally, they end their discussion of the first half of the sourcing process with a discussion around the need for flexibility and creativity in the sourcing process, a discussion that’s often overlooked. Significant savings are never found by doing the same-old, same-old or just applying one or two sourcing technologies. They are found when the parties come to the table, broaden their horizons, and look for new, creative, and innovative ways to meet organizational needs. And, as Bill and Joe state, suppliers are often much more motivated and engaged when buyers take an alternative approach. So be flexible — and stay tuned. Part I.2 is coming!