Monthly Archives: January 2015

Technological Damnation #77 e-Currency

We started out our series with the Economic Damnation of Currency Strength, which, thanks to the recent unexpected fluctuations in certain global currencies, probably has you shaking in your boots. But if you think trying to manage real currency exchange is bad, just wait until you have to start using non-country based e-Currency, like Bitcoin.

Bitcoin, a peer-to-peer payment system released as open source software in 2009, allows users to transact without using an intermediary using a decentralized virtual currency (or crypto currency) which has a value defined by the global market based on the fact that it’s limited and once all of it has been “mined”, there are no more units. Because of its structure, new units cannot be issued on a whim (whereas a country can print as much money as it wants, at the risk of hyperinflation), and, as a result, it’s value can, and has, skyrocket(ed) over night.

For example, up until late 2013, Bitcoin’s value was negligible, at which point it skyrocketed to a value of over one hundred. It stayed there for almost a year until early 2014 when it skyrocketed up to a value of almost 1200, before, over the last year, crashing back down to about 200 (in US dollars). On January 18, 2013 it’s value was 15.70. On April 9, 2013 it was $230. On April 16, 2013 it was 68.36. On May 4, 2013 it stabilized around 112.90. It stayed there until around October 15 when it began to skyrocket to 1,147.25 on December 4, 2013 then it crashed back to 522.23 on December 18, 2013 returned to 940.10 on January 5, 2014 and since then has been on a downward fall until January 18, 2015 when it was 199.56.

As virtual / crypto currency is still in its infancy, shocks like this can be expected and can be much more devastating than the recent drop in the Ruble. And, even worse, now that many vendors are starting to accept crypto currency as payment from global consumers that trust the currency, they will be expecting to pay with the currency as well. And your organization will have to hedge against new crypto currencies, which might also include Litecoin and Darkcoin (as well as a dozen others), as well as existing currencies. The fun is just beginning.

Authoritative Damnation #64 Major Activist Investors

An activist investor is technically defined as an individual or group that purchases a large number of a company’s shares and/or tries to obtain seats on the company’s board with the intent of effecting a major change in the company. A (public) company can become a target for an activist investor if it is mismanaged, has an excess cost structure, or is not capitalizing on its value.

And while one might be tempted to think that an activist investor is only bad news for Procurement if the company has excessive costs, that’s not the case. An activist investor is always bad news. It might be the C-Suite that is overspending (on private jets and tropical locales for “strategy meeting” getaways), it might be Sales and Marketing doing a lousy job, and it might be R&D failing to focus on the right products, but the first thing the activist investor will want is a balancing of the books — and that always, always, always starts with a focus on cost reduction across the board. Procurement could be in the top tier of spend management in its vertical or industry group, with an average spend that is 5% less than the industry average benchmark, but the activist investor will still demand that the organization pursue an across the board cost reduction at least in the 5% to 15% range — a reduction that will not be possible in many of the categories currently under management.

Plus, additional opportunities will likely only be available if Procurement is able to get more categories under management — which could be difficult even with Board Support as many departments, fearful of cuts that almost always occur when activist investors sway the Board, will not want to give up budget, authority, or supplier relationships for fear of becoming unnecessary. This will make it very hard for Procurement to deliver against unreasonable demands and increase the chances that they end up under-performing on the activist investor’s scorecard and end up looking bad when they are actually the top performing department in the organization.

(And we haven’t even mentioned the expectations that will be levied if Procurement is expected to play a key role in a merger or acquisition that an activist investor, investing in multiple organizations, is trying to engineer between it’s investments — because that’s a damnation in its own right that will be discussed at a later time.)

So what can you do? Baseline, Benchmark, Model, and Expose. Specifically:

  • Baseline
    Baseline actual costs for commodity groups and categories under management.
  • Benchmark
    Benchmark against publicly available rates and obtainable GPO rates to prove that performance is good and that any additional cost comes with a value add (in the form of quality, marketing, service, additional functionality, etc.)
  • Model
    Build should cost models that justify the validity of the baselines and/or benchmarks under current market conditions.
  • Expose
    Expose the overspending in categories not under Procurement’s control using baselines, benchmarks, and should-cost models and divert the attention of the activist investor elsewhere.

Organizational Damnation #58 Logistics

Logistics should be Procurement’s best friend, but if Logistics is a separate organization, Logistics can be one of Procurement’s worst enemies. This is because while Procurement believes that it’s job is to negotiate the best overall deal, including transportation, Logistics believes transportation is it’s business, and Procurement should just stick to unit price or landed cost from overseas suppliers and let Logistics use it’s relationships to get the best deal.

And while this sounds like a reasonable division of labour, there are a few issues with this arrangement.

  1. The best deal is not always on a purchase level.
  2. The best deal can not always be negotiated by Logistics that have long-term relationships with incumbent carriers.
  3. The best deal can often be improved by atypical routes.

What do we mean by this?

1. If Logistics is in charge, they will obtain “best rates” from current carriers for Procurement for regular routes. But these will be based on current contracts, not new contracts — and if the contracts were not obtained competitively, it won’t be the best rate.

2. if Logistics is in charge, they will look at preferred suppliers for “best rates”, and not go out to bid until it is time to renew the global standing offer contracts, bid sheets which will often be sent only to “preferred” suppliers only — sometimes new suppliers, especially in restricted geographies, will have the best rates.

3. If Logistics is in charge, they will typically look at a fixed set of typical routes — not atypical routes from nearby airpots, nearby ports, or nearby dockyards. It may require a few more miles on a truck, but if the airport fees from a secondary airport are half that of the major airport, it might be worth it.

Plus, the best deals are often negotiated when Procurement can put out a tender that groups nearby lanes on unrelated bids, they can often get better rate sheets for Logistics than Logistics can, especially since Procurement is often impartial and not managing the relationships day-to-day.

But if Procurement tries to use its ability to get Logistics a better deal, Logistics will feel that it’s rights are being trampled on and might do everything it can to get in the way. It will try to prevent tenders, feed backdoor information to preferred carriers, and spread rumours that your actions will damage relationships and increase prices.

What can you do? There are only two options.

Either Procurement manages to convince Logistics to use its processes and best practices to source transportation bids and get the best rates or it manages to convince the C-Suite that Logistics should be under its purview and that the two departments should be merged into one under the CPO.

Do You Know the Difference Between Direct and Indirect?

Direct materials are typically classified as raw materials, standard or specialized parts, and sub-assemblies required to manufacture a product. As a result, direct goods and services are typically classified as those goods and services that are strategically important to the organization. For example, for a CPG it is the goods it sells, for a Pharmaceutical it is the chemicals and biological materials it uses for research and drug production, and for a Bank it is the systems and market intelligence feeds it uses to run.

Indirect goods are those goods and services that are not strategically important to the organization. For example, for a CPG it is back office systems, for a Pharmaceutical it is office suppliers, and a and for a Bank it is office supplies.

However, these back office systems for the CPG are strategic for a software and services reseller. Office supplies are strategic for the office supplies vendor and janitorial services are strategic for the janitorial services provider.

But it’s not just the type of organization that determines whether a good is direct or indirect, it’s the organization’s place in the supply chain. What’s direct at one level is indirect at the next. And knowing where you are in the chain not only lets you know how to approach the category but how your supplier approaches the category. And, more importantly, where in the chain the most savings can be obtained.