Monthly Archives: December 2014

Optimization, Are You Ready for What Comes Next?

Probably Not. And if you haven’t yet downloaded Sourcing Innovation’s latest Illumination on Optimization, What Comes Next, then you’re definitely not.

As indicated in Sourcing Innovation’s recent post, So You Think You’ve Mastered Strategic Sourcing Decision Optimization, you haven’t even mastered the extent of strategic sourcing decision optimization available to you today. If you’re in the Hackett Group 8%, applying (at least baseline) optimization to the majority of your high-dollar and/or strategic categories, and are even building Billion Dollar sourcing models, then you might have mastered the basics of optimization 2.0. Barely. But optimization 3.0 is on the way.

And because you’re still struggling with the basics of model building, data collection, constraint definition, scenario comparison, and, most importantly, when you should use optimization (always, but not necessarily to make the award decision), you haven’t even had to time to realize that there might be more coming. And there is. Lots more. Just like there was a substantial increase in capability that hit the market starting between 2005 and 2007, about 5 to 7 years after most of the optimization vendors hit the scene circa 2000, we are reaching the point where the next set of rapid advancements in capability are about to hit the market, and those companies that latch on to these advancements first will be in a prime position to quickly advance down the path of supply mastery. They will be years ahead of the average company and decades ahead of the laggards. Decades.

These organizations will not only be the first to take optimization to the next level — and go from T-CAP (Cost of Acquisition and Production/Utilization/Distribution) to true TCO (Total Coat of Ooptimization) on their journey to TVM (Total Value Management) — but the first to merge big data, analysis, and optimization in new and innovative ways that will identify previously undetectable cost avoidance and value generation activities.

So, if you want to be one of this decade’s Supply Management leaders, download Sourcing Innovation’s new white-paper on Optimization, What Comes Next (registration required), sponsored by Trade Extensions, and start preparing for the future of optimization today. It will be worth your while and when you start applying these techniques, you won’t be disappointed.

Procurement Trend #06. Data-Based Predictive Analytics

Three annoying anti-trends remain. We’re so close to the end that we can almost taste the bitter-sweet victory, but the sour taste in our mouths still remains as we must continue to provide those fashionably-challenged futurists with counter-examples to the trends of their fore-fathers that no one who didn’t lock themselves in a windowless padded room would try to pass off as a trend of tomorrow. We want to shame them for their stupidity, but we will leave their hard-earned humiliation for LOLCat, who is obviously quite fed up at having to spend yet another life listening to their ludicrousness, but still finding the time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created.

So why do these pit-dwelling prophets from Hawalius keep pushing us trends from the rubbish pile? Besides the fact that some of them obviously spent the best part of last decade in a rancid cave, probably because they look around, see the laggard organizations still struggling with last decade’s technology, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are struggling with proper historical spend analysis, data-based predictive analytics is obviously a future trend, and

  • good decisions require good data

    and so few organizations have good data

  • inventory forecasting is getting harder and harder

    as sudden changes in unemployment rate, interest rates, and brand sentiment as well as unexpected supply chain delays or competitive product introductions can all have a large impact on demand

  • market prices are getting even harder to predict in volatile markets

    and profitability often depends on slim margins

Which would be great reasoning if leading organizations hadn’t figured this out over a decade ago and moved on to doing something about it a while ago!

So what does this mean to you?

Clean and Enrich Your (Master) Data

Dirty data dictates dastardly decisions. And those never end well. But don’t go crazy trying to do it. 100% clean data is a pipe dream, and, as with most situations, the 80/20, or, to be more precise, the 90/10 rule applies. Clean and enrich as required to confidently map 90%+ of spend, including 90%+ of the spend for the top 90%+ of suppliers and the top 90%+ of products. Stop when the effort exceeds the return. With a good mapping tool, the mapping can be done for even the largest Fortune 500 by hand in a week. Depending on how good the data is, the analyst might even get to 95% or even 98%. Then, identify any glaring weaknesses (such as supplier financial or risk data, market data, or cost breakdowns relative to a Bill of Material) that are important from a spend analysis or should cost modelling viewpoint, and get that data.

Put Protocols and Safeguards in Place to Keep your (Master) Data that Way

It’s going to take time, money, and manpower to map, clean, and enrich the data. This will be time, money, and manpower wasted if protocols aren’t put in place to make sure not just anyone can update master data, or at least not without review and verification. Put workflows and approvals in place to minimize the chances of bad data getting into the system or data getting out of whack too quickly.

Automatically Augment Your (Master) Data with Market Data

Good historical data is good. But current market data is better. With past and current data you can not only know current conditions, but with current market data, updated regularly, you can compute trends.

Use All the Data to Predict Trends and Make Sourcing Decisions

Use the computed trends to predict likely future conditions based upon the trends and current market movements. Based on this data, you can judge whether or not it is a good time to source a category and lock in long-term pricing.

Procurement Trend #07. Supplier Pre-Payment

Four anti-trends remain. We can count them on one-hand’s worth of fingers, but like LOLCat, we feel more compelled to provide examples of how far beyond retro the futurists really are when they provide us examples of trends that anyone who bothered to poke their head over their cubicle wall thirty years ago (or outside the yurt three thousand years ago) would have noticed. However, we’ll leave their bitter humiliation for LOLCat, who is obviously received very little enjoyment from this series, but still found the time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created and instead focus on dispelling the myths the futurists continue to propagate.

So why do these Rip van Winkles keep pushing upon us trends from yesteryear? Besides the fact that some of them obviously spent the best part of last decade napping, probably because they look around, see the laggard organizations still caught in the muck, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Why do they think Supplier Prepayment is today’s cure?

  • suppliers in emerging and even recently emerged countries may not have easy access to short-term financing
    which may mean that payday loans or family* loans may be required and as a result
  • interest rates vary and suppliers’ interest rates may be much higher than yours
    and costing the supplier, and thus you, 3% or 4% a month, not per annum
  • early payment can be the difference between blood red and black
    because with 36% APR loans, they double every 24 months a borrower doesn’t make a payment

So what does this mean?

Know the True Cost of DPO

How much is 30 day, 60 day, 90 day and 180 day DPO, from the time the supplier starts producing your order, really costing the supplier and, hence, since that costs needs to be built into their price, costing you?

Know the True Return on DPO extension

If the only reason to extend DPO is to get 2% annual interest in a short-term cash deposit, and this extension of DPO costs your supplier 24% annual interest, are you really making money off of this? If, however, you have the 1 in 100,000 situation where paying on time requires a loan from your bank at 12% and your supplier is on-shore, being government funded, and getting development capital at 6%, then in this case it actually makes sense to extend DPO until you are in a better position as it only increase the supply chain cost 6% instead of 12%. But this is probably a 1 in 100,000 situation.

Know what alternative investments net

Decreasing DPO might decrease supply chain cost, but if that investment requires smaller LTL (Less Than Truckload) orders and faster inventory turnover, this could cost more in the long run as FTL (Full TruckLoad) is cheaper and stock-outs cost revenue. Throw all the numbers, good and bad, into an optimization model and figure out what the best choice really is. Sometimes it will be early payment, or even pre-payment, of the supply base, and sometimes it won’t.

* Not their family, the family, capiche?

Procurement Trend #08. Lifecycle TCO

Five anti-trends remain. We can count them on one-hand, but like LOLCat, we feel more compelled to provide stupid examples of how back-water the futurists really are when they provide us examples of trends that anyone who bothered to poke their head over their cubicle wall ten years ago would have noticed. However, we’ll leave their humiliation for LOLCat, who has obviously received very little enjoyment from this series, but still found time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created and instead focus on blasting the myths the futurists continue to propagate.

So why do these Rip van Winkles keep pushing upon us trends from yesteryear? Besides the fact that some of them obviously spent the best part of the last few decades napping, probably because they look around, see the laggard organizations still caught in the muck, and assume they can still sell last decade’s snake oil in today’s marketplace. Why do they think Lifecycle TCO is today’s cure?

  • the supply management lifecycle in a typical company has been expanding
    for decades

    and cost models rarely keep up

  • once the margin has been taken out of the unit cost and the landed cost,
    the definition of cost has to expand to realize savings

    but most companies that claim to be looking at TCO are still looking at T-CAP

  • the most out-of-control costs are typically where you’re not looking

    and that’s the way, uh-huh, uh-huh, they* like it

So what does this mean to you?

Cost Models Have to Expand

Right now, most companies that claim to be focussed on Total Cost of Ownership (TCO) are really only focussed on Total Cost of Acquisition and Production (T-CAP). They are merely focussed on landed cost and costs associated with production (waste, etc.) and distribution and aren’t looking up the supply chain to energy, labour, and raw material costs and forward to maintenance, service, warranty and return costs or even further forward to reclamation, recycling, and disposal (related) costs. Every cost has an impact and any sudden increase or decrease can completely change the model.

Out of Control Costs Have to be Found

Wherever they are. Typically, a company heavily focussed on optimization will be focussed on T-CAP but not look at the expected warranty and return costs associated with switching to a lower-cost supplier or not break down the supplier’s quote to realize that the energy costs are much higher than expected and likely to rise rapidly in the region two potential suppliers are currently located in.

Cost Control Measures Have to Be Implemented

Once the cost models are expanded, the out of control costs are identified, cost control measures are defined, implemented, and performance against them is tracked. If the out of control costs are energy costs, then the organization might decide to implement its own renewable power plant (such as a solar farm or wind farm) for fixed plant energy requirements. A sourcing project is undertaken to source the plant and then, once its up and running, additional projects are undertaken to control maintenance costs, etc. Year-over-year costs are tracked to insure the realized savings on a production-cost-per-megawatt basis are realized so that the organization will see its ROI within a defined period of time.

Piece of Cake, eh?

Tired of Historical Viewpoints? Want Insight into Real Trends?

Then you need to download Sourcing Innovation’s latest white-paper on Top Ten Trends for Supply Management Value Generation in 2015 (registration required).

If you’re like the doctor, then you’re tired of reading about the same old “trends” year after year that were tired old trends twenty years ago. Not only does it show a lack of insight on the part of the trend promoter, but it shows a lack of forward thinking on the part of the receiver to keep on listening.

Sourcing Innovation and the doctor are so tired of these futurists who are stuck in the past, and the fact that they have everyone convinced they should be asking for trend updates on a semi-annual basis, that in September, SI published a series on The Future of Procurement that specifically focussed on we shouldn’t be talking about the future of Procurement after all. First of all, as clearly illustrated in the series, thirty of the thirty-three trends that are commonly being promoted as future trends are not future trends at all. Secondly, some of these trends are so old, they weren’t even future trends of your forefathers. Thirdly, and most importantly, trends which are entirely in the future don’t help you when you’re still struggling to prepare for next year.

The trends you need to know about are the trends that are at the leading edge that are relevant to your business now, not ten years ago, and not ten years ahead in one possible future. So, for those of you who want to cut to the chase and get a bead on the real trends that will help you today and tomorrow, and not a tangent into the obvious or an excursion into the dark ages, download Sourcing Innovation’s latest white-paper on Top Ten Trends for Supply Management Value Generation in 2015 (registration required), sponsored by BravoSolution.