Monthly Archives: May 2013

Buying and Negotiating on TCO – A Must Know for Any Supply Management Organization!

At this point in time, very few people are still in the stone ages of Supply Management and buy on price per unit (PPU) alone, the first level of sourcing value. However, there are still a number of buyers in a number of organizations that still buy on landed cost or total cost of acquisition (TCA) and buy solely on the sum of price per unit, transportation, duty, tariff, temporary storage, and other costs that are incurred from the time an order is placed until the time the product is received. These organizations are still in the dark ages of Supply Management and need to find the light very, very quickly. Most modern Supply Management organizations attempt to buy on total cost of ownership (TCO), the third level of sourcing value.

The most commonly used metric today by analysts, consultants, vendors, and (I’m sorry to say) bloggers, it is a comparative cost metric that quantifies the overall cost of each acquired unit from a direct, indirect, and quantifiable market perspective that takes a broader look at the cost of a product from an acquisition, utilization, and delivery perspective. In addition to the landed costs, it also considers indirect utilization, supplier switching, and transaction costs as well as cost adjustments for quality, waste, and brand power (if your supplier has a brand that increases the selling price of the product you create with the component). TCO captures the ‘true cost’ of a product (or service) from a supplier and does a much better job of helping you to compare apples-to-apples when determining the best buy for your organization. It’s not the ultimate metric, as that’s total value management (TVM), the next level (and pinnacle) of sourcing value measurement, but you cannot apply TVM until you have mastered TCO (which is a big component of TVM just like total cost of acquisition is a big component of TCO). Plus, the effort required to apply TVM isn’t worth it in all categories. If the category is low-spend, non-strategic, or best handled in a leveraged purchasing agreement, you don’t bother with TVM. (Just like you don’t bother spending hours looking for the absolute cheapest supplier when buying a box of printer paper for your home office as saving $2 isn’t worth hours of your time, you don’t bother with an advanced analysis on the office supplies category.)

An in-depth understanding of TCO, and how to negotiate on TCO, is vital to the success of your Supply Management department as your organization’s success ultimately depends on the proper application to every category you source now that we are returning to (rampant) inflationary times. To assist you in the acquisition of this knowledge, Next Level Purchasing is hosting a webinar on How to Negotiate and Buy on Total Cost of Ownership this Thursday, May 30, 2013 @ 8:30 am PDT / 11:30 am EDT. It’s free to all NLPA (Next Level Purchasing Association) members, and basic membership in the NLPA is free! (Join Here!)

The webinar, which will be presented by Todd Snelgrove, Global Manager for SKF Group, will teach you how to reduce organizational costs by managing TCO. You’ll learn about updated strategies, techniques, and TCO-reducing
methodologies. The webinar will delve into real world case studies and share the experiences and pitfalls to watch out for. You’ll leave this webinar with a firm understanding of the do’s and don’ts of buying on TCO.

To register for this free, live, event, Login to the NLPA, navigate to the “Webinars” tab, and click on the webinar to get to the registration screen.

Do You Know Where Your Towel Is?

You Better! It’s international Towel Day, the day where we all carry a towel with us to commemorate The Hithchiker’s Guide to the Galaxy and the dreams of Extra-Planetary Supply Management that it instilled in all of us. Without the inspiration contained within this great book, there wouldn’t be people working hard to make a Lunar Mission, and the extra-planetary supply management that goes with it, a reality. RIP Douglas Adams.

I Am The Freight Container

I am the freight container
And I now just where I stand
Another freight enabler
And another caravan
Today I am your champion
As I have won your hearts
And I know the game
You won’t forget my name
And I’ll still be here
In a hundred years
As I’m still state of the art

I am the freight enabler
As I have reduced your price
The things you did not know at first
You learned by doin’ twice
And you cannot replace me
No mater what they say
No one else can dent
by ninety seven percent
shipping costs compared
to loading freight impaired
by old bulky wooden crates.


Little did Malcom McLean know when he first invented, patented, and then sent the first metal shipping container on its way on April 26 in 1956 that it would do more to enable global trade than any treaty or global trade organization ever would. As pointed out in this recent economist blog that asked why have containers boosted trade so much, a recent paper by Daniel M. Bernhofen, Zouheir El-Sahli, and Richard Kneller on Estimating the Effects of the Container Revolution on World Trade, has disentangled the impact of trade deals from that of shipping containers and derived a rather shocking result. Analyzing the data from 22 industrialized countries, the study found that that containerization is associated with a 320% increase in bilateral trade over the first five years and a 790% increase in bilateral trade over 20 years. On the other hand, a bilateral free-trade agreement only boosts trade by 45% over 20 years and membership in GATT (the General Agreement on Tariffs and Trade) raises trade by 285%. In other words, a trade agreement will boost trade 50%, membership in GATT will increase trade by a factor of two and a half, but containers will increase trade by a factor of 8!

So, not only did they greatly reduce shipping costs (by 97% according to the shipping records maintained by Mr. McLean who saw his costs per tonne fall from $5.83 per tonne for loose cargo to $0.16/tonne), but they have already done more for global trade than any long winded bureaucrats and diplomats ever will.

What Risks Lurk in Your Supply Chain?

Do you know what risks are hiding in the dark and dreary basements of your supply chain? Are your suppliers using sweatshops that will ruin your image if they are discovered? Did your primary supplier build the only factory that can provide you that custom make chip on the ring of fire? Do floods threaten to wipe out supply routes over low-land sub-sea level plains? Does civil unrest threaten to close off borders? Is your primary carrier on the verge of financial bankruptcy? Are you sure? Really?

Risks in your supply chain are not like the Ravenous Bugblatter Beast of Traal — they’re worse. They don’t assume that just because you don’t see them coming that they can’t suddenly appear and swallow your organization whole. They are there, and for four out of every five companies, they are going to materialize over the next year and send shockwaves that reverberate and echo through the entire supply chain, causing millions of dollars of loss and damage along the way.

And, even worse, it seems that the risks are multiplying. A quick review of the eighth annual risk report from the World Economic Forum (Global Risks 2013) gives one the impression that, like memes, risks have learned to mate and multiply at a pace more rapid than ever thought possible. (Even LOLCats will soon be left in their wake if risk management continues to be ignored in 2/3rds of organizations.)

You need to be aware of sub-tier risks in your supply chain and, more importantly, you need to know how to assess them. If your supplier of corrugated cardboard goes out of business, that’s no big deal as there are dozens of corrugated cardboard suppliers. But if your custom control chip manufacturer can’t produce your chips because of a rare earth shortage, you need to know well before the shipment doesn’t arrive and you have to shut down an entire automotive production line.

For every relevant risk, you need to be able to get a grip on both the consequence of the materialization of the risk and the potential cost of the disruption it will create. There are likely more risks than you can enumerate, but there are only so many likely to happen, and only so many of those with dire consequence. As long as you can properly identify, assess, and develop mitigation plans for those with dire consequence, you can rest assured that, whatever happens, you will survive the storm. But if you can’t …

So how do you identify and assess sub-tier risks? We’ll get to that in a series of posts on visibility that will begin this summer, but if you want a leg up on your competition, I would suggest that you strongly consider the forthcoming webinar on Assessing Sub-tier Risks by Resilinc, who will be doing a deep dive into a proper process, the benefits it will produce for your organization, and the high cost of doing nothing in today’s global economy.

You can Register for the webinar, which will take place on June 19, 2013 @ 11am PDT / @ 3 pm EDT, at your earliest opportunity.

The webinar will be hosted by Reslinc’s founder, Bindiya Vakil, who has a Master’s of Engineering in Logistics from MIT with a thesis that addressed Design for Logistics, Planned Obsolescence, and Recycling long before Supply Management realized the importance thereof and the need for visibility in order to achieve these goals. (the doctor knows this first-hand as he has been preaching this, mainly on deaf ears, since the beginning of SI — see this early post on Design for Recycle from back in 2007) As a result of this work, and work since, Bindiya has found that visibility is not only key to long term supply chain viability, but also to resiliency in an age of rapid supply chain globalization and the risks that come with it. In this webinar, Bindiya will share what she, and Resilinc, have learned over the last decade about assessing, and managing, risks in your supply chain.

Why is Supplier Relationship Management (SRM) Under-delivering?

It’s a good question, and it needs some good answers. As a result, I was drawn to Bill Young’s two-part blog (Part I and Part II) over on Procurement Leaders earlier this month as I have some ideas, but wanted to see if they matched up with the insights of others.

Most of his observations were correct, namely that:

  • There is a confusion over what SRM is.
    It’s not just software or handholding – as Mr. Young points out, it involves organizational structure; governance; supplier engagement model; joint activities; value measurement; systematic collaboration; and technology/systems.
  • Current incentives focus on short term results.
    Most organizations are laser-focussed on the mythical goal of “savings” and immediate payback, not long-term value generation.
  • Lack of clear accountability and who takes the blame when something goes wrong.
    So no one is incentivized to do anything beyond what they are minimally required to do.
  • Legacy attitudes and behaviours.
    Not only do many old-school negotiators believe that every deal is a win/lose zero-sum game, but organizations that need SRM most are broken and (still) believe that “coordination and relationship management” is not part of a well-oiled organizational machine (that should work like an automotive assembly line).
  • Suppliers’ unwillingness to challenge customers.
    They don’t want to speak up in case the extra air movement will rock the boat.

However, the observation that I believe is closest to the truth is the one pointed out by readers who noted the

  • Skills gap.
    There is a huge gap between the skills required for normal category management, and the competencies needed for complex, ongoing, internal and external relationships. (This is because, as SI has repeatedly pointed out, the average Procurement professional does not get nearly enough training.)

As far as SI concerned, the primary reason that SRM under-delivers is that it is not embedded in a category management lifecycle. Because it is misunderstood and because there is a huge skills gap in the average Procurement professional where SRM is concerned, it tends to be pigeonholed into the “procurement” part of the category lifecycle (which is phase 6 of the 9 phase strategic category management lifecycle), driven off of a balanced scorecard, and managed by a SPM (supplier performance management) solution. However, as pointed out in Part II of the strategic category management post, formal supplier management starts as soon as the contract is signed and doesn’t stop until the last unit of product is recovered or returned. And formal supplier management is only part of Supplier Relationship Management which starts with the first reach out to a potential supplier in the supplier identification phase and continues until a contract award phase where the supplier fails to win any additional business from you (and you brief the supplier as to why in an exit briefing).

In short, it’s underdelivering because it’s under-applied, undermanaged, and mis-understood.