Monthly Archives: May 2012

Who sets supply chain standards?

After hearing about the recent NIST (National Institute of Standards and Technology) Interagency Report (7622) on 10 Practices to Secure the Supply Chain, it got me wondering as to who should set the standards. Supply Chains are global, so it shouldn’t be a single government agency, even if it’s a standards agency. While supply chains run on technology — it’s only one of the three corners of the supply chain triangle, with the other two being talent and transition (management).

But, of course, supply chain standards are probably not high on the WTO (World Trade Organization) agenda — as the primary purpose is to supervise and liberalize international trade — keeping the flow smooth. Trade agreements take priority over standards. Someone has to bite the bullet and take the challenge. But we need more than high-level practice definitions. These are the 10 perspective practices that the NIST recommends:

  1. Uniquely identify supply chain elements, processes and actors
  2. Limit access and exposure within the supply chain
  3. Create and maintain the provenance of elements, processes, tools and data
  4. Share information within strict limits
  5. Perform supply chain risk management awareness and training
  6. Use defensive design for systems, elements and processes
  7. Perform continuous integrator review
  8. Strengthen delivery mechanisms
  9. Assure sustainment activities and processes
  10. Manage disposal and final disposition activities throughout the system or element life cycle

Taken one by one:

  1. obvious, no help here
  2. also obvious, no help here either
  3. you should be doing that already to conform to the plethora of trade and security regulations you’re already subject to
  4. given the lack of openness in most supply chains between trading partners, this is probably already happening
  5. this is good advice — it’s common knowledge, but when it comes to training, no one is listening
  6. here’s where it gets good — I don’t think defensive design is part of supply chain design today and it’s a great approach to keep things in perspective
  7. that’s just good risk management
  8. that’s just part of continuous supply chain improvement
  9. this is good advice too — while the sustainability message should also be common knowledge, there’s not enough action on this front either
  10. this is great advice — everyone focusses on the acquisition, but often neglects that, at some point, everything created has to be destroyed; everything acquired has to be disposed of

In summary, I give it a 4 out of 10. So, what would be good recommendations? We’ll take that up in a later post. But for now, do you have any?

How Much Does That Enterprise Supply Management Solution Really Cost, Part II?

In yesterday’s post, we asked how much an enterprise supply management solution really costs because the up-front license cost or annual subscription fee is only one part of the puzzle — and until the full puzzle is understood, it’s hard to figure out what the true cost is and, ultimately, what’s the right solution for the organization. The difficulty is the plethora of license models, and add-on fees, that have been invented by on-premise and SaaS/Cloud vendors over the years in an effort to get a leg-up on their competition (and a siphon into your corporate piggy bank). In today’s post, we’re going to review three proposals from three vendors, Siphon, Skimmer, and Drip. Then, we’re going to demonstrate how to compare them on equal footing.

Siphon is proposing an on-site enterprise solution with a perpetual license cost of 50K plus 100 per user, an implementation fee of 20K, an up front customization fee of 15K for reporting, 25% maintenance, and up-front training of 10K for administrators and 20K for users. It also requires a database, application server, and a middleware license — which have their own maintenance fees. It also requires (3) servers to host the product, space in the data centre, an administrator / developer to maintain the customizations, and a user support person.

Skimmer is proposing a hosted ASP solution with a perpetual license cost of 50K, an additional fee of 50 per user, an additional fee of 1K per integration, and a small transaction fee of $1 per transaction. Maintenance is 10%, but the initial implementation cost is 40K, not counting the 20K for custom reporting or 20K for integration with external systems. User training is 20K up-front.

Drip wants to go pure multi-tenant SaaS for a hosting fee of 40K a year, with 30K up front for implementation, 20K up front for custom reporting, 10K for external systems integration, and 20K up front for training. However, ongoing training, largely self-led, is minimal at 5K / year.

On the surface, Drip sounds expensive if you’re looking to make a 5-year commitment because it’s 200K in license fees, as opposed to 50K for Siphon and 50K for Skimmer, but Skimmer has over 100K in additional up front costs (bringing your down-payment to 150K) and Siphon has at least 75K of up front implementation costs (bringing the total to 125K) plus whatever it costs for the database, app server, and middleware.

The only way to really understand what the respective costs are is to build a detailed cost model that allows for an apples to oranges to pears comparison that allows for similar elements to be compared on an equal footing when possible, and total cost to be understood.

To this end, you need to build a cost matrix similar to the one below (which is contained in this free cost model spreadsheet [that you can use at your own risk*]) so that you can determine the true cost of the solution over the time-span you expect to use it. (Be it the 1, 3, 5, 7, and 10 year time-frames pre-calculated, or some other time-frame). Then fill in the gaps.

For starters, with respect to Siphon’s proposal, we have to cost out the database, application server, and middleware. When we do that, we find that the db license is 15K plus 30% annual maintenance, the application server is 10K plus 25% maintenance, and the middleware server is 20K plus 20% maintenance. Plus, we need to buy 3 servers to support it — one for the application and middleware, one for the database, and one for the web application server. Digging deeper, we find out that it needs five custom module integrations, and each will cost 2K, tacking another 10K onto the proposal in addition to the 10K required to integrate with external systems. Digging into the support requirements, it’s going to require 50% of an admin’s time, and that person costs 90K a year, and 100% of a support rep’s time, and that person costs 60K a year. The servers will consume about 6K of power, an additional 3K of backup services will be required, and the annual maintenance on the database, middleware, and app server will cost 5K, in addition to 5K of annual training to keep the admin up to date.

Skimmer, being a hosted ASP solution, also requires an annual hosting fee of 20K for data centre costs in addition to the 50K perpetual license cost, and an additional fee of 10K in each subsequent year for training.

Drip, being a pure multi-tenant SaaS, has no other costs.

When we put it all together, we end up with the table below:

On-Premisee Hosted ASPP SaaS
Perpetual License (K)
Flat Fee 50 50 0
Per User 0.1   0
# Users 100   0
Per Module 0   0
# Modules 5   0
Per Integration 2   0
# Integrations 5   0
Per Server 0   0
# Servers 3   0
Total 70 50 0
Annual Hosting Fee (K)
Base Fee 0 20 40
Per User 0 0.05  
# Users 0 100  
Per Module 0 0  
# Modules 0 5  
Per Integration 0 1  
# Integrations 0 5  
Per CPU Hours 0 0  
# CPUs 0 0  
Per Transaction 0 0.001  
# Transactions 0 300  
Total 0 30.3 40
Maintenance % (0-1) 0.25 0.1 0
Equipment Up Front
Server Count 3 0 0
Server Cost (K) 8 0 0
Server Life-Span (Yrs) 3 0 0
Total 24 0 0
Mandatory Software
Perpetual DB License (K) 15 0 0
DB Maintenance % 0.3 0 0
Perpetual App Srvr License (K) 10 0 0
App Srvr Maintenance % 0.25 0 0
Perpetual Middleware License (K) 20 0 0
Middleware Srvr Maintenance % 0.2 0 0
Total Software (K) 45 0 0
Total Maintenance (K) 11 0 0
Implementation Cost (K) 20 40 30
Ext. Sys. Integration (K) 10 20 10
Custom Report Development (K) 15 20 20
Upfront User Training (K) 20 20 20
Ongoing Training (Yearly) (K) 10 10 5
Data Center Costs
Admins/Developers Rqrd 0.5 0 0
Annual Salary (K) 90 0 0
Support Reps 1 0 0
Annual Salary (K) 60 0 0
Power (K) 6 0 0
Integrated Systems Maintenance (K) 5 0 0
Backup Fees (K) 3 0 0
Ongoing IT Support Training (K) 5 0 0
Total 124 0 0

And then when we summarize the costs, breaking them down into first year and subsequent year, we get the following summaries:

First Year Costs
On-Premise Hosted ASP SaaS
Perpetual License 70 50 0
Equipment (Computer) 24 0 0
Mandatory Software 45 0 0
Base Implementation 20 40 30
Ext. Sys. Integration(s) 10 20 10
Custom Reporting 15 20 20
User Training 20 20 20
Year 1 Data Centre 124 0 0
Year 1 Hosting/Subscription 0 30.3 30
Total Up-Front 328 180 110
Ongoing Yearly Operating Costs On-Premise Hosted ASP SaaS
Hosting/Subscription 0 30.3 40
Maintenance Fees 17.5 5 0
Maintenance Fees
11 0 0
Equipment Upgrades 8 0 0
On-going Training 10 10 5
Data Centre Costs 124 0 0
Total Yearly 170.5 45.3 45

And then we quickly see that, in the first year, SaaS is the cheapest and On-Premise the most expensive and, more importantly, that going forward, On-Premise is considerably more expensive due to high data centre costs. We also see that, overall, SaaS will be the cheapest solution but this doesn’t mean it is the right solution as the cost of Hosted ASP and SaaS in subsequent years is almost the same, and if the Hosted ASP provider can offer substantially greater security and reliability with the single instance they are offering (as opposed to the multi-tenant SaaS solution), it might be worth the additional 70K up-front cost for the Hosted ASP solution — especially if the company is looking to commit for a longer term (like 5 years). Plus, With the costs so similar, a negotiation might be able to reduce the base implementation and integration costs, putting the Hosted ASP solution on par with the SaaS solution. However, none of this would be clear without this total cost calculation. So do your homework, and your detailed year-over-year costing, before selecting a solution. It will pay off.

* All warranties or representations, express or implied, are disclaimed and you take complete responsibility for the use, or misuse, of the template.

How Much Does That Enterprise Supply Management Solution Really Cost, Part I?

Pardon my language, but GFQ: Good Fracking Question! With the way that most providers price these days, it’s really hard to tell and bravo! to Chain Link Research (CLR) for taking up the issue in a recent 2-part piece on SaaS Pricing: Insanity or Good Deal for Users (Part One and Part Two). When I first broached the subject back in 2009 in my series on An Enterprise Software Buying Guide (Part I: Overview, Part II: Cross Functional Team Formation, Part III: Need Identification, Part IV: Potential Solution Identification, Part V: Cost Model Definition, Part VI: Cost Model Calculations, Part VII: Negotiations and Part VII: Contract Definition & Management), I thought I was the lone crazy voice talking to the cat in the corner that wouldn’t listen because, at the time, everyone thought SaaS was always cheaper and the wave of the future. (Sometimes it is, sometimes it isn’t.) The reality is that up-front license cost or annual subscription fee is only one part of the puzzle, and until the full puzzle is understood, it’s hard to figure out what the true cost is and, ultimately, what’s the right solution for the organization.

As the CLR articles point out, the first thing you have to figure out is what you’re buying. Is it on-premise, hosted ASP, or SaaS/Cloud, and then, more importantly with respect to today’s cost models, is it enterprise or community? I.E. Is it 100% internal to your organization or does it allow you to connect with different organizations within the extended enterprise as well as supply chain partners? Is the price fixed, per usage metric, or based on Spend Under Management (SUM)? If your organization only has 20% SUM today but is buying the solution to get to 80% spend under management, then the cost of the solution is going to quadruple overtime. What sort of user connectivity is supported? Is it in-house only? Remote? Multi-location? And, today, multi-device? (Executives want everything, whether it makes sense or not, to work on their iPad and/or iPhone.) How secure is it? And how much hardware and/or how many data centre resources are going to be required to support it?

If it’s on-premise/hosted ASP, is the license perpetual or for a limited term? If it’s SaaS, is it single-tenant or multi-tenant? What sort of availability or security assurances are there? Is anything being outsourced?

And then, once you get a grip on the basic delivery model, you need to start coming to terms on how the solution is being priced. For SaaS, what is the frequency of subscription payments? What is the payment based on — site license, number of seats, number of transactions, CPU utilization, bandwidth utilization, storage requirements, and/or dollar volume processed? And what are the up-front costs? Is there a one time integration or implementation fee? Any customization fees? Any training fees? The list goes on.

Similarly for enterprise. Is the license fee fixed-term or perpetual? Site license, by user, by server, or by CPU? Does it require any middleware that must be licensed separately? What is included in the way of implementation and integration? In terms of user training and, more importantly, site administrator / developer training? How much customization is required? The list goes on.

For an average business user trying to select the best solution for the business, it’s like trying to compare apples to oranges (which can be compared, by the way — see this post) to processed fuel (which is of an entirely different composition and has an entirely different production cost model, unless, of course, it’s corn-based ethanol). But there is hope! Stay tuned for Part II!

Time to Take the First Step on Your Next Level Supply Management Journey

And download the new BravoSolution sponsored Sourcing Innovation WhitePaper on Taking the First Step on Your Next Supply Management Journey [registration required] today if you haven’t already.

The acronyms and acclamations are still flying fast and furious in the Supply Management space and phrases like VFS, Hi-Def Sourcing, Next Level Supply Management, and Next Practices aren’t going anywhere — and neither is your organization unless it’s on the road to improving it’s Supply Management practices (unless it’s in the Hackett Group 8% and has a solid plan to stay there).

Chances are that, right now, your organization is somewhere in the standardization and complexity reduction phase of maturity, and if you’re reading SI, approaching the phase of operational excellence. A few of you are in the operational excellence phase, and maybe even approaching the final phase of strategic business enablement, but given that excellence is a moving target, even if you’re lucky enough to be there, it’s going to take work to stay there now that you need to be an expert in QFD, CMM, TVM, KM, SRM, SIM, WM, GSM, NPD, IRR, ROI, ROIC, EBITDA, EV, EVA, NPV, TTM, and TTV! (Don’t know what these are? Read the white-paper!)

In order to advance, a Supply Management organization needs to master the nine axes of excellence, which are:

  • Sourcing Process
  • Organization
  • Finance
  • IT
  • Product Management & Marketing
  • Risk Management
  • Asset Management
  • Relationships
  • Metrics

These axes, along with some key achievements necessary to progress the next level ladder, are defined in SI’s new white-paper, sponsored by BravoSolution, on Taking the First Step on Your Next Supply Management Journey. Download it for FREE now [registration required].