Monthly Archives: April 2014

Is Supply Chain Finance the new Prisoner’s Dilemma?

In the classic logic problem known as the prisoner’s dilemma, there are two prisoners, being held on a minor charge (such as breaking and entering) which comes with a 1 year prison term, suspected of conspiring together to commit a serious crime (such as grand larceny). There is little actual evidence to convict either of them and the police are relying on a confession by one or both prisoners to convict at least one of them of the more serious crime. In an effort to get this confession, the two prisoners are separated and each is offered an identical deal. The deal is that if one prisoner confesses, he’ll be set free, instead of spending 1 year in jail, and the other prisoner will get a 3 year sentence. If neither prisoner confesses, they each do 1 year, and if both prisoners confess, they will both serve time, but only 2 years each for coming forth. What should the prisoners do?

When the dilemma is analyzed using game theory, each party is most likely to betray the other and spend 2 years in jail rather than remain silent and enjoy the best possible outcome of only 1 year in jail. This is because, regardless of what the other prisoner chooses to do, each prisoner believes they improve their likely outcome by confessing, even though an analysis of the possibilities …

P1 Confess? P2 Confess? P1 Sentence P2 Sentence
N N 1 1
N Y 3 0
Y N 0 3
Y Y 2 2

… indicates that each Prisoner is expected to do an average of only 1.5 years, and betrayal increases time served. Why? It has to do with something called the Nash equilibrium, which is a solution concept of a non-cooperative game where no player has anything to gain by changing only their own strategy (which is often the case when both players have to choose their strategy in secret) and results from the fact that the payoff relationships from each prisoner’s perspective make confession the only case where each player would do worse by unilaterally changing strategy. In simple terms, this means that if prisoner 1 chose confession and prisoner 2 chose confession, then either prisoner changing their choice on their own would result in that prisoner serving more time. In psychological terms, if you don’t confess, and your colleague does, you serve an extra two years while he walks free.

So what does this have to do with Supply Chain Finance (SCF)? Peter Loughlin does a great job making the comparison in his new Purchasing Insight paper on Demystifying Supply Chain Finance, sponsored by Taulia. Simply put, even though the best situation for many buyer-supplier relationships (where a SCF solution that would help both parties is not available) is the status-quo (of no supply chain finance), there is often an incentive for one party to choose a solution that benefits them, even though, as in the case of the prisoner’s dilemma, the choice of that solution often damages the other party considerably (by adding cost to the other party, just like the prisoner’s dilemma adds time).

The reason for this is that each primary SCF solution, for reasons that are clearly explained in the white-paper, has a sweet-spot and any relationship that falls outside of that sweet-spot isn’t helped by the solution, and may even be hurt by it. In a very cramped nutshell:

  • Supplier Finance only helps large volume/dollar suppliers of large buyers because banks aren’t willing to bear the cost of on-boarding the long tail of the supply chain
  • Dynamic Discounting only helps favoured suppliers because most buyers typically don’t’ have the liquidity to pay the entire supply chain early and not all suppliers have e- solutions that integrate with the buyers’ dynamic discounting solutions (assuming that the buyer will extend or negotiate terms across the entire supply base)
  • Pre-Shipment Finance doesn’t help the buyer or give the supplier access to borrowing at the buyer’s creditworthiness

For more details, download Purchasing Insight’s new white paper on Demystifying Supply Chain Finance. It’s worth it.

Procurement Key Issues from the Hackett Group, Part II

Last month, the Hackett Group, as part of its Procurement Executive Insight series, released its 2014 Procurement Key Issues report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments. It had some very interesting findings, including the fact that Procurement in 76% of companies surveyed indicated that a top priority was to expand procurement’s scope/influence. This is logical, but a little unexpected giving that the top Management priorities are to grow revenue and improve margins / profitability, at 66% and 61%, and most companies still see margin improvement in an uncertain market as cost reduction since limited or no-growth markets don’t generally take favourably to cost increases.

It seems that, as Hackett notes in its insight, we have the situation where many of the Procurement groups in Hackett’s survey stable have reached the upper limit of cost reductions possible in categories they actively source today and are interested in taking on new spend categories in an effort to unearth additional savings and meet the savings targets they are still being (implicitly) given for the organization to achieve it’s margin improvement.

While I applaud the long-needed alignment from this group of Procurement organizations that are obviously in the above-average and best-in-class categories — because savings are a thing of the past with (hyper)inflation returning to historical norms, raw materials in many categories become scarce (and supply barely meeting demand), and transportation costs continuing to increase — I worry that the finance organization is not yet aligned with the need and, when push comes to shove, will resort to a strong arm instead of a gentle hand, putting Marketing, Legal, and other non-physical product organizations on the defensive.

      Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

This will not only result in a push-back from the internal departments that Procurement needs to help, but from the vendors and third-parties that the Marketing, Legal, and other non-physical product departments rely on to keep the organization running. The disdain dripping from the forced smiles on all sides will be visible across the room …

      Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
And hopes they won’t wind up dead

You have to remember these are vendors who are used to doing deals with a wink and a smile in the back room or skybox of their favourite entertainment venue and sealing them with a firm handshake. Terms? Conditions? Agreed Upon Rates? Performance Requirements? Contracts? This is a whole new ballgame to a vendor used to doing the work and sending a one-line invoice when it’s done.

      Where the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road

The vendors are going to try and bypass Procurement at every opportunity …

      Rep in the front seat
Lawyer in the back seat
Gettin’ it on the dotted line
Got a snake in the bed
Lord, hissin’ on the headboard
Trying to lure you offside

… and if the Marketing, Legal, and other affected internal departments aren’t onside with the new process 100%, any chance of savings and spend control are going to fly out the window. Not only will a side-stepped process result in a deal that is at least as expensive as last year’s deal (and probably more as the incumbent preferred vendor will probably cry poor due to inflation), but nothing will be done to reduce the demand side volatility, threat of competition (which often requires true partners and not just preferred vendors), and supply volatility that are the top three business drivers that Procurement has identified as needing to be addressed.

In summary, the fundamental Procurement focus is right, but has the rest of the organization caught up? And does Procurement really have a firm handle on what it needs to do to extend its reach and deal with all of the external business drivers that are hitting it hard, which also include the need for more (trained) talent and the skills gap, the increasing regulatory risk around the globe, and risk of a truly global economic crisis? Looking at the technology priorities, SI is not certain that it does.

In closing, the 2014 Procurement Key Issues report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments is an interesting and thought-provoking read and you should add it to the top of your reading stack.

Procurement Key Issues for 2014 from the Hackett Group, Part I

In song, to the music of Where the Rubber Meets the Road by Meatloaf.

Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
And hopes they won’t wind up dead
Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

Son, I’m Mr P.C.
And believe you me
I’m the ultimate king of correct
And if you wanna make it
You gotta make them take it
As a sign of your deep respect
If you’re gonna do it
You gotta see through it
To the honour-bound duty it is
You can call Branding absurd
And flip Agencies the bird
Just remember what your mission is …

When the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road

Ya say “Girl, you’re a beauty
But I’m no beast
I got a little contract right here
See, we can slam on the brakes
Anytime we got the stick
Even if we’re in fourth gear”
Rep in the front seat
Lawyer in the back seat
Gettin’ it on the dotted line
Got a snake in the bed
Lord, hissin’ on the headboard
Trying to lure you offside

Where the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road
Where the rubber meets the road
Buyer meets Rep then watch it explode
Yes means no means yes means no
Where the rubber meets the road!

Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
With hopes they won’t wind up dead
Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

The Board Gamers Guide to Supply Management Part XVI: The Rivals for Catan

You’re enthralled with (The Settlers of) Catan. Whether you are settling the uncharted islands of Catan or the uncharted planets in Star Trek Catan, you love acquiring your resources, negotiating the best trades, building your outposts and upgrading them into cities (in space), and sneaking your way to victory with a timely acquisition of the longest supply route or the largest force (with the occasional surprise victory point from a well-timed development). You really wish you could square off against the new guy one-on-one who thinks he is better than you, but (Star Trek) Catan is a 3 to 4 player game.

Fear not! Today Sourcing Innovation brings you the answer in its continuing guide to board games for (aspiring) supply management professionals. The answer is the two player variant called The Rivals for Catan, which was released on the 15th anniversary of the Catan Card Game, which was released shortly after the original release of The Settlers of Catan. (Which, low and behold, also comes in an iOS Version. It’s a good implementation and you will find that the tutorial in this game is also well done. However, while the doctor certainly prefers the iOS version of Le Havre for a one-on-one game, due to the significant amount of set up and tear down the board game requires, The Rivals for Catan is one game where the doctor definitely prefers the board game version if the circumstances permit.)

In Rivals of Catan, just as in The Settlers of Catan, you are trying to build your way to victory, which is achieved when you get to seven victory points in the base game or twelve victory points in an extended game (to be discussed at a later time). You receive one victory point for each village, two for each city (which is upgraded from a village), and one victory point each for the strength or trade advantage.

You build using the five standard resources of wood, brick, grain, wool, and ore, just as in regular Catan, but, if you get any, you can also take advantage of a sixth resource — gold — that can be traded for other resources you require. Resources are produced by a die roll at the start of each player’s turn, and the resource(s) that are produced are those produced by resource cards owned by the player which bare the number rolled, provided a player has enough room to store the resource. In Rivals for Catan, a resource card can only store 3 resources.

Each player starts the game with two villages, one road connecting them, and one production card for each resource. Each time he or she builds an additional village, she gets two more resource cards (if slots are available to hold them). In addition, if the player has a scout, he or she can choose what those resources are (instead of getting random resources). (A Scout is an expansion card.) However, she can only build a village if she has already built a road with an open end.

The big difference between Rivals For Catan and the Settlers for Catan, besides the fact that it is designed for 2 players, is that development cards are replaced with expansion cards (which can add buildings, ships, and heroes to your province) and success is highly dependent on strategic utilization of these cards. In the base game there are 36 expansion cards divided into 4 stacks. At the start of the game, each player takes 3 cards from the top of 1 card stack. These cards form the player’s hand and she can play them at any time on her turn if she has the resources and space to do so.

The expansion cards come in three forms: buildings (14), units (6 trade ships and 6 heroes), and 9 actions. The buildings generally increase resource production (such as the marketplace which gives you an extra resource if a production roll gives your opponent more resources than you), protect you resources (as the storehouse protects resources on neighbouring regions when the brigand is rolled), or enable progress (as each progress point given to you by a building allows you to hold one more card in your hand). Ships improve your trading ability with the bank (as the brick and grain ships, for example, will let you trade two to one instead of the base rate of three to one), and heroes contribute towards a strength or trade advantage (providing 1, 2 or 4 strength points and 1, 2, or 3 commerce points). The first player to reach 3 strength or commerce points has the strength or trade advantage until the other player exceeds the strength or commerce point total achieved by the first player to achieve the advantage. The actions allow you to trade 3 gold for 2 resources, trade (up to two) other resources one for one, choose the result of a production roll (like a Munchkin Loaded Die), relocate any two production regions or expansion cards, or Scout for resources of your choice.

Furthermore, to add more chaos to the mix, each production roll is accompanied by an event, determined by the event die. The event can be a plentiful harvest (which grants each player a resource of her choice), a celebration (which allows the player with the most skill points to receive 1 resource of her choice), a trade day (which allows the player with the trade advantage to receive 1 resource of her choice from her opponent), a brigand attack (which causes each player to lose all of her gold and wool if she has more than 7 resources), or a random event (drawn from the event stack). The random event could be a fraternal feud (which sees the player without the strength advantage losing two cards from her hand), a travelling merchant coming to town (that allows each player to trade gold for resources one-to-one, a year of plenty (which sees each player getting an extra resource for each storehouse and abbey in their province), a trade ships race (where the player with the most trade ships gets an extra resource), a feud (where the player without the strength advantage loses a building), or a new invention (that sees each player get a resource of his choice for each progress point he’s acquired). A lucky roll could see your province suddenly become resource rich and an unlucky roll will not only result in your province becoming resource poor compared to your opponent, but could also result in the destruction of a much needed building.

Remembering that we are Supply Chain Professionals doing business in the global marketplace, the first of us to secure and deliver all of the products and services we need to meet all of the customer demands wins the game. We secure the products and services we need by managing supply and reserving limited production and distribution capacity. We find out which resources are limited by watching the market and taking note of tumultuous events. In today’s marketplace, no supplier will be able to meet all of our component or service needs on their own, so we will not only have to barter and trade with multiple suppliers, but also with our competitors and their suppliers in tight markets. And there will be nasty surprises waiting for us. A natural disaster may wipe out part of the raw material supply or Somali pirates may seize a precious shipment. We hate the pirates. They are dicks. But if our shipments get robbed, it’s not the end of the world. There are other ways to serve our customers. We can use the insurance money to buy from someone else, we can redesign our products to use alternate materials, or we can focus on a new or different substitute product or service to get us, and our customers, through the worst of times.

And as The Rival for Catan, we are constantly trying to secure the resources we need to acquire our workers (heroes), construct our buildings, procure our ships, grow our company (to new villages and cities), and obtain strength and trade advantages over our competition. We have to do this in the midst of disaster (pirate attacks, what dicks!, civil uprisings, and legal injunctions [that take your resources from you]). And we have to take advantage of good fortune when the opportunity arises (and the market prices drop and we can trade [significantly] cheaper than normal).

The Rivals for Catan a great two-player game to sharpen your strategic supply management skills. Try it out. (And for extra practice, and training, try the iOS Version).

How BizSlate is Bringing Sexy Back to ERP! Part II

As per our last post, ERP used to be sexy, but hasn’t been that way in a while. That needs to change, because ERP should be sexy. Fortunately for us, BizSlate has decided to do something about it. They agree that ERP should be appealing, exciting, glamorous, trendy, and just a little risqué and are doing something about it. In our last post, we discussed what they are doing to make it appealing, exciting, and even glamorous. And if that isn’t enough to whet your whistle and take a look at what a modern ERP should be, today we’re going to discuss some of the things they are doing to make it trendy and even risqué!

Trendy

When it comes to ERP, Icona Pop got it right:


You’re on a different road I’m in the Milky Way
You want me down on Earth, but I am up in space
You’re so damn hard to please, we gotta kill this switch
You’re from the seventies, but I’m a nineties bitch

Fundamentally, ERP hasn’t changed since the nineties, which is two decades behind where it needs to be. When ERP came out in the late 80’s, the World Wide Web didn’t even exist. It was 1992 before the first commercial sales website was put up, and 1995 before the US National Science Foundation lifted its strict prohibition of commercial enterprise on the internet (which, as per our recent history lesson, was almost immediately followed by the release of the first commercial spam — damn you, NSF!). One-click on-line shopping? It wasn’t even a pipe dream! By the time Amazon.com hit the mainstream in the late nineties, the ERP, formally defined by Gartner Group back in 1990, was quite mature and, like an old dog, unable to learn new tricks.

That’s why BizSlate went back to basics and rebuilt its ERP from the ground up. This allowed it to replace old-fashioned OLAP with real-time reporting, offline down-time forecast generation with real-time what-if forecasting, batch-mode accounting/procurement system integration and reporting with real-time integration and query execution, etc. For the first time in over a decade, ERP is trendy again — and it’s not even 2038!*

Risqué

It’s disruptive — in addition to the appealing, exciting, glamorous, and trendy features discussed above, it’s re-built the ERP from the ground up to follow and support the life-cycle of the product through your supply chain. Additional features that have been included to support this are cross-reference SKUS, which allow you to track, and use, all of the different SKUS used by your suppliers and customers seamlessly and interchangeably; a full-featured web-based API that allow a front end interface to be developed for any web-based browser (so a slimmed down interface can be developed for your smartphone, should you so choose, and their product already supports the iPad, allowing your sales people to check product availability and take orders in real-time on the trade show floor with 100% confidence that all promises made can be kept); support for multiple types of e-Document exchange and the ability to define the type of e-Document exchange (EDI, XML, e-mail PDF attachment) that will be used with each customer or vendor for each type of communication; fine-grained roles and responsibilities and appropriate support for company, agent, supplier, vendor, and licensor representatives; multi-order receiving capability (which isn’t even found in mature products like NetSuite), multi-order shipment update; an API for shopping cart integration (in alpha); etc.

All this is in addition to the unique bulk order functionality, tight GL integration, multi-edit capability, pre-pack/re-pack functionality, and document generation discussed in our first two posts on how BizSlate is ERP for the Small to Mid-Size Distributor that was Released to Mid-Sized Distributors and Retailers to the Masses last year.

BizSlate wants to redefine what it means to be ERP. And bring sexy back to ERP.


* ERP hasn’t been trendy since it was promoted as the cure to the year 2000 problem, brought about by mainframe, mini-computer, and windows programmers that decided to save bytes by representing years using two digits instead of four. The next impending disaster isn’t until 2038, when all Unix-like systems that store the system time as a signed 32-bit integer, reach their maximum value. (Unless, of course, you think the Network Time Protocol will fail when it reaches it’s max value in 2036.)