Monthly Archives: October 2012

Federalist No. 18

In Federalist No. 18, Hamilton and Madison team up to address the ongoing issue of the insufficiency of the present confederation to preserve the union.

One of the key takeaways from this essay is summed up in these words a weak government, when not at war, is ever agitated by internal dissentions, so those never fail to bring on fresh calamities from abroad. As proof of the pudding they offer, they recount a history of Greece and how the relatively weak union they formed eventually broke down as rival city states went to war. Had Greece … been united by a stricter confederation, and perservered in her union, she would have never have worn the chains of Macedon, and might have proved a barrier to the vast projects of Rome.

The majority of the essay is spent recounting the histories of the Grecian republics, and the battle between Athens and Sparta and the Achaean league in particular, because it teaches more than one lesson. It emphatically illustrates the tendency of federal bodies rather to anarchy among the members, than to tyranny in the head. As a result, there should be little concern about the Union trying to abuse the power it is given. The essay is a good read, and a great refresher on some of the finer points of historical inquiry, but if you’re in a hurry you can skip the history lesson and get right to the takeaway – a strong Union is always better than a weak confederacy.

Are You Ready for the 4th Quarter Crunch?

Even though businesses can choose their own fiscal years, many choose to coordinate with the calendar year. As a result, the 4th quarter is now upon them, and, in any company that is not best in class, a lot of people are getting anxious about meeting their numbers. It happens every year, and even if I’m not oot and aboot (NSFW*), I see it indirectly every year in the 4th quarter slump (when blog stats take a temporary dive).

And this year, many supply management professionals have good reason to be worried. While the economy has started on the road to recovery, the road is full of potholes and, with the impending U.S. election, we don’t know what’s going to happen and whether or not the U.S. Congress that is elected on November 6 is going to vote to raise the debt ceiling or take the U.S. over the fiscal cliff. Given the lack of sound economic and global trade policy since Clinton left office, it’s hard to say what’s going to happen.

The issues is that many of these professionals did’t plan for the rapid increase in some commodity cost categories, talked about risk but never took mitigating actions, and didn’t take the time to upgrade their skills so that they could continue to do more with less (as we all know that even though many companies are spewing the talent talk, they aren’t engaging in the talent walk [and will be surprised when the market eventually rebounds and their top talent walks out the door, but that will be another post]).

But the year’s not over yet, and there’s still things they can do to not only mitigate the “damage” that is expected as year-over-year spend increases, but contain costs and demonstrate their ability to add more value to the organization before the year is up.

Three things in particular that they can do right away are:

  • Have Finance Agree to Better Cost Savings and Avoidance Metrics
    As discussed in yesterday’s post, savings on categories negotiated this year should factor in (index & formula based) commodity rate increases and exchange rate fluctuations and cost increases on spot-buys should be calculated using similar year-over-year comparisons. This way, even if the Sourcing team couldn’t get to as many categories as they’d like, and savings were less than anticipated, a better, more realistic, picture is painted.
  • Start Monitoring Contracts and Supplier Performance more Actively
    Has the supplier been billing at contract rates, honouring discount levels, and shipping on time with an acceptable defect rate? If the supplier is over-billing, if discounts are missed, and if shipments have to be constantly expedited at higher costs, the savings that were negotiated evaporate rapidly. Increasing the rate of savings capture across all high-spend categories will go a long way to meeting targets.
  • Take some online / distance training that can be done after hours
    Increase your skills, increase your efficiency, increase your supply management opportunity astuteness, and do better at every task you do. There are a number of options, and some, like Next Level Purchasing, offer certifications recognized to various degrees around the globe.

And then they can start planning for next year by pushing for the acquisition and implementation of better technology and the transition to new and better processes.

* But hilarious!

Federalist No. 17

In Federalist No. 17, Hamilton again continues his discussion of the insufficiency of the present confederation to preserve the union.

In this essay, he moves on from the discussion of the ability of a loose confederacy to both claim and protect the territories, posts, and natural resources that it should be entitled to and away from the discussion of the increased risk of Civil War presented by a loose confederacy to address the objection that the government of the Union [may be] too powerful and enable it to absorb those residuary authorities, which it might be judged proper to leave with the States for local purposes.

To this end, Hamilton admits that he is at a loss to discover what temptation the persons entrusted with the administration of the general government could ever feel to divest the States of the authorities of that description. He notes that commerce, finance, negotiation, and war seem to comprehend all the objects which have charms for minds governed by that passion; and all the powers necessary to those objects ought, in the first instance, to be lodged in the national depository. After all, we must deal with foreign nations as one nation, or we are no better than a collection of loose confederacies, regardless of what title we convey on the union.

Furthermore, the administration of private justice between the citizens of the same State, the supervision of agriculture and of other concerns of a similar nature, all those things, in short, which are proper to be provided for by local legislation, can never be desirable cares of a general jurisdiction. As such, the Union would see no benefit in pursuing them at the federal level, so there should be no cause for concern because it is therefore improbable that there should exist a disposition in the federal councils to usurp the powers with which they are connected; because the attempt to exercise those powers would be as troublesome as it would be nugatory.

But even, for argument’s sake, if we assume that mere wantonness and lust of domination would be sufficient to beget that disposition, it is the case that it will always be far more easy for the State governments to encroach upon the national authorities than for the national government to encroach upon the State authorities.

Furthermore, there is one transcendent advantage belonging to the province of the State governments, which alone suffices to place the
matter in a clear and satisfactory light, — I mean the ordinary administration of criminal and civil justice. This, of all others, is
the most powerful, most universal, and most attractive source of popular obedience and attachment. As a result, this great cement of society, which will diffuse itself almost wholly through the channels of the particular governments, independent of all other causes of influence, would insure them so decided an empire over their respective citizens as to render them at all times a complete counterpoise, and, not unfrequently, dangerous rivals to the power of the Union.

How do you measure savings?

It’s a tough question, but if you’re good at what you do, and you want to “win” at the end of the year, be sure you factor in currency fluctuation, inflation, and, if necessary, demand shift, because, on a per-unit basis, you can always save against market average if you’re good at your job and normalize the expenditures.

Here’s the foundation for a simple formula you can use to make this measurement. In reality, it will be a bit more difficult as you’ll have to calculate the actual increase in cost due to a change in the commodity index (as the commodity will only be one cost component in the total cost of the good being purchased), the realized difference in the exchange (as the currency conversion may cost you additional basis points), and the demand shift relative to a fixed interval, and not a fixed point, in time. But this simple example will suffice to show how, if you calculate appropriate unit costs, you really can’t lose even if the overall spend in the category goes up (because, without your efforts, it would have went up a lot more). And this is just fine (as long as you don’t double count the savings some other way).

Let’s say that, using appropriate benchmarking, backed up by indices and correlating cost models that are accepted by finance as reasonable, you calculate that the average market price per unit is $12 and you sign a contract for $10, for an expected savings of $2. Then, a year later, you find that the result of commodity inflation increases the cost per unit $1.20, for an increase of 10%, and the currency exchange increases $0.05 not in your favour, for an increase of 5%. What have you saved?

Savings/unit = (market cost/unit) – amount paid * (1 + currency increase) = 13.2 – 10 * 1.05 = 13.20 – 10.50 = 2.70

  market cost / unit = (base price/unit + cost increase/unit)

% Savings/unit = (savings/unit) / (market cost/unit) = 2.70 / 13.2 / 20% (WOW!)

Now, let’s say next year, you agree to a price increase to $10.50, but inflation increases unit costs by another $1.80 and the currency exchange only falls to $0.03 not in your favour. How did you do year over year?

Savings/unit = (13.2 + 1.80) – 10.5 * 1.03 = 15 – 10.5 * 1.03 = 4.19

% Savings/unit = 4.19 / 15 = 28% WOW!

  Costs increased 10%, but you increased your savings of 20% against market average to 28% against market average year over year! Looking at the big picture makes a difference since accepting 50% of the cost increase saved you considerably in the long run as prices continued to rise.

Federalist No. 16

In Federalist No. 16, Hamilton continues his discussion of the insufficiency of the present confederation to preserve the union.

In this essay, Hamilton begins by noting that it has been seen that
delinquencies in the members of the Union are its natural and necessary offspring; and that whenever they happen, the only constitutional remedy is force, and the immediate effect of the use of it, civil war. Truer words could not have been said as History served to prove Hamilton right (with the civil wars that would still erupt until the Union was complete and in agreement on core principles).

Furthermore, if there should not be a large army constantly at the disposal of the national government it would either not be able to
employ force at all, or, when this could be done, it would amount to a war between parts of the Confederacy concerning the infractions of a league, in which the strongest combination would be most likely to prevail, whether it consisted of those who supported or of those who resisted the general authority. In other words, while civil war could occur within a Union, the potential for civil war is much higher between a loose conglomeration of confederacies.

In addition, where military is concerned, even in those confederacies which have been composed of members smaller than many of our counties, the principle of legislation for sovereign States, supported by military coercion, has never been found effectual. Plus, it has rarely been attempted to be employed, but against the weaker members; and in most instances attempts to coerce the refractory and disobedient
have been the signals of bloody wars, in which one half of the confederacy has displayed its banners against the other half.

So, if we want to minimize the chances of civil war, a Union is much better than a loose collection of confederacies, especially when the Union stands as one.