Monthly Archives: January 2015

Benchmarks Will Re-Define (Re-)Sourcing .. but that is Just the Beginning!

Today, benchmarks are used to determine how well an organization has performed to date. While constant measurement is important, it doesn’t really add value. Tomorrow, benchmarks will be used in conjunction with optimization to not only measure progress, but to help the analyst determine the most appropriate method for re-sourcing an existing category that will be the most likely method for delivering additional savings going forward.

Tomorrow, before a category is re-sourced, an optimization will be re-run on market-adjusted historical data to compute a market baseline, which is the proper definition of a benchmark, that will be used to determine a if there is a potential savings opportunity using strategic sourcing decision optimization. If there isn’t, then a better approach will be defined for the category.

More specifically, the current market pricing for the commodities, as defined by the benchmark, will be compared to current organizational pricing and the differential will be used to adjust all of the historical prices for a baseline optimization. In addition, the distribution model will be updated as appropriate (with new lanes, new carriers, and new temporary storage options added) and current rate tables will be included. If this baseline optimization indicates a reasonable savings opportunity, then the category will be re-sourced using a multi-round negotiation process backed by strategic sourcing decision optimization.

If, on the other hand, this baseline indicates that costs are likely to rise, then the organization knows that it should change the sourcing approach and instead try for a contract extension at current, or only slightly increased, rates.

More details can be found in SI’s recent white-paper, sponsored by Trade Extensions, on Optimization, What Comes Next, but this is just the beginning. Automated Optimization, Stratified Optimization, and TVM Optimization will find opportunities that your organization never knew existed (and never will without these techniques).

To find out how optimization, when taken to the next level, will completely redefine your strategic sourcing and category management, download SI’s latest white-paper on Optimization, What Comes Next.

Source-to-Settle: More than Just a Set of Service Modules

Having Source-to-Settle capability involves having more than Source-to-Contract and Procure-to-Pay solution modules. As explained in our last post, if an organization wants to achieve the best results, just having both solutions is not enough. Certain categories of savings and value only materialize when the Source-to-Settle solution is integrated end-to-end.

For example, due to the existence of multiple, disconnected solutions which rely on multiple, disconnected databases, there are huge accuracy issues.

First of all, there is a proliferation of manual errors due to duplicate data entry. When data has to be manually re-entered into other systems, or selected for export and import to other systems, human error always creeps into the process. The average error rate for keystroke entry is approximately 1%, as tabulated by Raymond R. Panko at the University of Hawaii, and this human error can be very costly. For example, assume the contract pricing for laser cartridges has been erroneously entered into the Procurement system as $70 a unit when it should be $60 a unit. Further assume that the organization buys 1,000 of these a year and that the old rate was $69.95. If the Procurement system has a tolerance of error of 0.1%, then it will never detect if the Supplier continues to charge the old rate and the organization will overspend by $11,940. Now assume that the organization buys 10,000 units a year and all of a sudden the organization is out $119,400!

But this is just the tip of the iceberg. With multiple systems, there is no single version of the truth. So, if there is disagreement between the P2P and the ERP system, which system is correct? And which system do you run the analysis on to identify the target categories for sourcing? It makes a difference. The greatest value comes from identifying the category with the greatest opportunity. And that can only be done with complete, accurate data.

For more information on these missed opportunities, along with fourteen other opportunities that only materialize with an integrated Source-to-Settle solution, download Sourcing Innovation’s latest white-paper on how An Integrated Source-to-Settle Platform Brings Unparalleled Benefits to Supply Management and register for Ivalua’s upcoming webinar on how to Help Build Your Business Case Today on January 28 @ 11 PST / 14 EST / 19 GMT!

Societal Damnation #38: The Sharing Economy

Sharing is a good thing? Right? Isn’t that what we’re all taught when we are young?

Well, yes, unless you are the one who isn’t being shared with, or the one who refuses to share. And if you are the one who refuses to share, you may find that not only are you without partners, but without means as well.

As covered in our recent series on the “Future” of Procurement in our first Shiny New Shoes post, The Sharing Economy is one of the few true future trends of the space. And while it’s a breath of fresh air to one who is constantly inundated with futurist drivel, to the average Procurement Professional that is still trying to come to turns with the foundational values of strategic sourcing and the collaboration it requires with core suppliers, it’s downright scary. So scary, in fact, that it can be considered the next in a wave of plagues to descend upon an average Procurement department, still struggling to replace the fax machine with a web-enabled e-Sourcing Solution.

While this sharing economy is currently in the domain of individuals like you and I, and a handful of small businesses who have latched on, this share economy is going to migrate to medium sized businesses en-masse and, when properly utilized, give these businesses access to the latest and greatest technology and economies of scale that these medium-sized businesses will be unable to acquire on their own. Can’t afford to buy that new automation and production system that increases throughput, improves quality, and decreases natural resource consumption? No problem. Form a cooperative with quasi-competitors, build a new factory with the new production technology, and effectively time-share it (for the operating cost). This will put medium-sized businesses on the same playing field as large enterprises and level the playing field in ways that have not yet been thought of. The hippies succeeded and their ideas changed the world — 50 years later.

But it might not be a world your organization gets to conduct business in if it cannot accept, embrace, and form the new reality to its advantage. How will it do this? It will start by identifying opportunities that it cannot achieve on its own. Then it will have to identify what partners it would need to bring those opportunities within its grasp. Finally, it will need to put together a plan to unite those partners and execute it to completion.

This may sound easy, but adopting the necessary mindset, convincing others inside and outside of the company, and then working together across organizations as a team while each member collectively fights on behalf of their respective organization for what they perceive their share of the market to be will not be easy. It will be challenging, but the persistent will prevail. It’s just one labour. Hercules had twelve.

Geopolitical Damnation #31: China and the New Silk Road

China is arguably, and simultaneously, the world’s oldest culture and the world’s newest mega-economy and super-power. Not only does China have the 2nd largest GDP in the world, but it is one of only 4 countries that are net international creditors (the other three being Norway, Luxumbourg, and Switzerland). In comparison, the US, with the largest GDP (of slightly less than 18 Trillion), has an external debt that is roughly 18 Trillion. (In other words, it’s debt now exceeds its annual GDP!)

It’s also the world’s most populous country with 1.35 Billion people and the second largest country by land area. It has the world’s third longest river, 14,500 kilometers (or 9,000 miles) of coast lines, approximately 130 ports open to foreign ships, over 11,000 kilometers (or 6,800 miles) of rail, and over 180 commercial airports. It’s rail network and ships transport a significant percentage of the world’s global trade and traffic is still increasing annually.

China is no longer the emerging economy of the 80s and 90s that you outsourced to and imported from — now it is the emergent economy that is outsourcing to Brazil (to serve the North American Market, consider Foxconn) and Africa (to serve the European market). And, for most multi-nationals, it’s their newest, and most promising (and potentially most profitable) market. China already has over 220 billionaires, and this number increases annually. (The US has 442.)

And as a result, China is turning the traditional sourcing world topsy-turvy — especially now that the New Silk Road (China’s Grand Strategy has been operational for eight weeks. (Source: UNZ) As described in the UNZ article, and on SI last fall (in What Impact Will The New Silk Road Have on Global Trade?, for e.g.), this 13,000 km railroad that crosses China from East to West and then Kazakhstan, Russia, Belarus, Poland, Germany, France, and finally Spain enables trade across most of Eurasia. And when the high-speed rail is complete, transport from China to Europe will take even less time than it does now. And China, which is home to 7 of the world’s top 10 container ports and which serves up air cargo that represents more than one-third of global trade value (even though only 1% by weight), will control even more of global trade then it does now! While also being your biggest customer.

You can’t deal with China in the old way anymore. Gone are the days when they were the low cost provider that needed your business. Gone are the days when you could fall back on Mexico. And gone are the days when you never needed to worry about the China market. Now they are a lower cost provider, due to their increases in efficiency (just like Japan increased in efficiency after WWII), but they don’t need your business. They have money and they have the world to sell you. Because Mexico was almost abandoned for China, there are few factories left that can produce modern electronics and none that can produce the volume to equal a Foxconn. And with most markets stagnant, China is one of your few opportunities for growth. Moreover, the supplier you are negotiating with to produce your cell phones for Engineering might be the same supplier your sales team is negotiating with to buy IT’s new mobile factory management software suite.

In other words, when China is across the table, they are not a vendor or supplier that can be beaten down with old-school hard-ball negotiation (even if they historically put melamine in the milk, lead in the paint, and who knows what in the pet food) — they are a partner, and equal, and must be approached as such. Even if you never sell to them, you might sell to one of their partners, and they talk just like we do. This doesn’t mean that you shouldn’t be determined in your negotiations — as you should always fight for the best deal — but be fair, realistic, and base your demands on fact and should-cost models, not empty threats or baseless demands for unreasonable cost reductions.

China is about to become your upstream as well as your downstream supply chain. You have to abandon your old view of the world, accept this reality, and start preparing for it. It doesn’t have to be the damnation that causes your undoing. It can be your salvation. Your choice.

Infrastructure Damnation #13: Ports & Labour Strikes

Last year, in the fourth quarter during the critical Christmas shipping season, truckers, clerks, dockworkers, and other union workers went on strike and effectively closed the Ports of Los Angeles and Long Beach. The Port of LA typically receives over 330,000 TEUs (Twenty-Foot Equivalent Units) of loaded inbounded containers each month, which equates to roughly 4 Million or so TEUs a year. A single TEU container can hold up to 47,000 lbs of cargo and can accommodate 796 bushels of soybeans or approximately 6,192 shoeboxes. (That’s a lot of shoes! At the rate of 1 pair a day, it would take over 17 years to wear them all.) And while we haven’t yet been able to find a tally of the losses, as a benchmark, if the ILWU (International Longshore and Warehouse Union) went on strike and shut down all the west coast ports, estimates are that it would cost the US economy 2 Billion a day. A complete shutdown at the ports of Los Angeles and Long Beach would, thus, likely cost the US economy over 1 Billion a day since, of the roughly 116 M short tons of foreign imports that came into West Coast ports in 2012, 74 M (over 60%) of those short tons were through the ports of Los Angeles and Long Beach!

In 2013, a 40-day labour strike occurred at the Kwai Tsing Container Terminal in the Hong Kong Dock Strike. This strike cost Hongkong International Terminals almost HK $5 Million in daily losses as the loss of over one third of the workforce caused average delays of 2 to 4 days for all ships. That’s a loss of roughly HK $200 Million!

In 2012, the industry was almost paralyzed when the East Coast ports threatened to go on strike on October 1, as this strike was only narrowly averted at the last minute. This strike could also have cost the US Economy Billions.

In 2008, in protest of the Iraq War, the ILWU encouraged longshore workers to “shut down all West Coast ports” by walking off the job on May 1, 2008 to “Make May Day a ‘No Peace, No Work’ holiday”. On that day, more than 10,000 ILWU workers from all 29 West Coast ports voluntarily stopped work, effectively shutting down all west coast ports for a day.

In 2007, we saw the German National Rail strike of 2007. While it was only for 3 days, starting on November 14 and ending on November 17, it was the largest strike in history against Deutsche Bahn, shutting down freight service as well as passenger trains. Even though management brought in managers and other employers to keep trains running, more than 40% of freight trains — needed to carry cargo to and from docks — were halted. The strike cost over € 50 Million a day.

Strikes aren’t a new occurrence. We can keep going, all the way back to (at least) the 1792 Philadelphia River Pilot’s strike. More importantly, since unions aren’t going anywhere (and are, in fact, gaining ground in the emerging and newly emergent economies), strikes aren’t going anywhere either.

And they will bring your global trade to a halt if you are not prepared for them.

How do you prepare for them? Keep an eye on all of the ports, rail, and trucking companies you use to move your goods and when their union contracts expire. When expiration draws near, monitor the situation. If it looks like talks will break down, make sure you have alternate options at the ready. Have plans that use other ports, and other trucking companies, even if those ports are further and those trucking companies cost more, if the goods are critical to your bottom line — and if they are strategic, and small enough, consider air freight from a secondary airport to a secondary airport. (Solutions like FreightOS can often help you identify nearby ports and airports and relative costs.) While the hope is that you will never need to use less efficient and less cost-effective options, if the alternative is risking your goods trapped in a port for months, a less profitable sale is still much better than no sale. (Remember, No Sale, No Store.)