Monthly Archives: September 2015

Geopolotical Damnation 29: Trade Embargoes

Today’s supply chains depend on global sourcing and global trade. However, a single trade embargo with a single country on a single commodity can disrupt an entire supply chain. If you depend on apples for your primary CPG product line, beef for your restaurants, or rare earth minerals for your cell phone, and your primary supply line gets cut off, now what?

Or, even worse, if the country in question decides that gaming systems are destroying society and your main product is a gaming system, that gambling is now illegal and your main products are video lottery machines, or that coal is too dirty to burn and your company is a mining operation, instead of case closed, it could be business closed. (And all of these situations have happened in recent years!)

Note that an embargo is more than just a block on trade, it’s also a restriction on trade that restricts how much can be imported or exported or the tariffs that are charged to import or export. For example, China recently ended it’s export quota for rare-earth minerals essential for high-technology products including smartphones. But what if it’s re-instituted, and re-instituted more restricted than before? Especially when they supply up to 97% of the rare earth minerals needed worldwide?

Or what happens when a country decides that it wants to enforce a buy-local policy and increases import tariffs on a category from 10% to 100% or more? For example, last December the US Department of Commerce announced new anti-dumping and anti-subsidy rates for PV (photovoltaic) products imported from China and Taiwan, with the primary CVD (chemical vapour decomposition) rate for Trina Solar increasing from 18.56% to 49.79% in less than six months. This is nothing compared to the “China-wide” rate of 165% for smaller PV providers! But the US isn’t the only company that does this. Every country in the BRICS is constantly changing their import rates as well, sometimes in response to North American or Europe rate changes, sometimes in response to local taxpayer and/or lobbyist demand. (Brazil recently updated its HS code 80 times in one year!)

Needless to say, a tripling of the import/export rate or a restriction on exports that cuts your limited supply in half can be almost as damaging as a full embargo against a commodity or product. If the restriction results in a widespread failure to meet the demand, which in turn results in bad press, the end result could be considerable brand damage and a widespread migration of your customers to your competitor. This drop in revenue puts the entire company at risk, which will greatly impact the Procurement budget and the ability of the department to perform!

An Open Invitation to the Trade Extensions Workshop for Practitioners

Trade Extensions, a leader in Sourcing Optimization (and a sponsor of Sourcing Innovation), is having their annual user conference on October 7 (2015) in London. As pointed out yesterday by Mr. Smith in his invitation, this year they are opening it up to a small number of practitioners who want to learn more about advanced sourcing and sourcing optimization, and, Sourcing Innovation and Spend Matters UK readers in particular. (Outside of the Trade Extensions website, you won’t see this invitation anywhere else.)

Unlike some vendor conferences, that spend hours and hours demoing their new products and discussing where they are going and how great it will be for you as a customer, Trade Extensions keeps anything even remotely marketing related to an absolute minimum in their events, preferring to focus more on education and best practice then on sales. (Last year, except for a very brief “here’s what we did over the past year, here’s what we’re doing, and here’s a few screen shots of what the new capabilities look like“, the rest of the day was spent on presentations by experts and practitioners on best practices, process transformation, and advanced sourcing (including a presentation by yours truly on what comes next in sourcing optimization). (If you got in a bit late or left a bit early, you wouldn’t even know who was putting it on.)

This year, they want to cram even more education into a single day. With presentations by Sigi Osagie, who’s gonna tell you how to get your Procurement Mojo on, Mr. Peter Smith, who’s going to discuss the Future of Procurement (which, in the doctor‘s view is Doomed. Marooned. And ready to be Entombed.), and Sindbjerg Hemmingsen, a known thought leader on responsible procurement, the day is going to be jam packed with education and useful information. And if that’s not enough, it’s another opportunity to meet the elusive yours truly who will be there to …

Oops! Can’t tell you that … yet. Trade Extensions has a few surprises this year for its attendees beyond holding the event at Emirates Stadium (which is home of the Arsenal Football Club, and a known haunt of many Premiere League legends who seem to get lost in the halls and never leave) and the dinner at the British Library. Let’s just say that even the gift bag might knock your socks off.

So, if you are a practitioner (or a consultant practitioner who is not locked into an exclusive engagement with a provider) who would like to learn more about sourcing best practices and advanced sourcing, this could be your lucky day. But you need to book here quickly. When the seats are gone, the seats are gone. And this is one event you don’t want to be left out of.

Economic Damnation 02: Bank Failure

As per Wikipedia, a bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. Since some banks, including the Federal Reserve, have a license to literally print money, most people think that bank failure is impossible. But since some banks over invest in hedge funds, high risk mortgages, or commodity markets, it can happen and it has happened.

Banks have been failing since they first incorporated, and the fiscal crises in the late 2000’s caused the failure of a number of really big banks, including Washington Mutual, Lehman Brothers, and Bear Stearns. And regardless of how many new acts are passed to try and insure banks limit their risk exposure or keep enough cash on hand to cover withdrawals or payouts in the case of a loss, banks will still fail. Regulators will never keep up with the new and inventive ways banks and investors will come up with to invest, and lose, money (and shady replacements for hedge funds and high risk mortgages will soon be on the way), and banks will continue to fail. Possibly even yours.

And if you depend on that bank for letters of credit and inventory based loans, this could be more of a problem than losing any cash above the FDIC (or equivalent) insured amount. Having your critical supply lines stop, your production lines go down, and revenue losses mount by the day as you search for a new bank, new lines of credit, and new inventory loans will be far worse than a short term cash loss which can happen anytime a market shift causes demand for a high-selling product to suddenly drop, forcing a fire sale of a large amount of remaining inventory.

And, as per the Wikipedia article, the failure of a bank is relevant not only to the country in which it is headquartered, but for all other nations that it conducts business with, especially if the bank owns investment subsidiaries in those markets. People are put out of work. The local economy drops. And everyone suffers. Yet another damnation waiting around the corner.

Why You Should Not Build Your Own Contract Management System

A couple of months ago, SI ran a short series on Why You Should Not Build Your Own e-Sourcing System, which also included pieces on Why You Should Not Build Your Own Spend Analysis, Why You Should Not Build Your Own e-Negotiation Platform, and Why You Should Not Build Your Own Decision Optimization because he heard that a
few public sector organizations have this crazy idea that they can build their own and that it can, somehow, compete with best-of-breed solutions on the market today.

As per that series, this is not the case.

And even though SI has said in the past not to put too much emphasis on traditional, first generation, contract management solutions compared to analysis and optimization when the organization is seeking efficiency and cost savings, because most first generation contract management solutions looked like they were built by a high school student in Microsoft Access (and offered no more functionality than such a solution would contain), this doesn’t mean you should build your own either.

First of all, newer contract management systems go beyond simple document management functionality, and, thus, contain significant functionality that cannot be built by a high school student with Microsoft Access.

Second, most users want a Microsoft Word experience for authoring or versioning, regardless of whether or not there is a better way, so you will have to spend countless hours on a seamless Word integration, and Microsoft integration is no piece of cake.

Third, you will be wasting a lot of time and money re-inventing the wheel that has already been reinvented about a dozen time. Talk about a big waste of (public) money!

Consider the core absolutes of contract management that everyone can agree on.

1. Authoring & Versioning

As we just said, everyone, and especially everyone in Legal, wants Microsoft Word authoring & versioning, so no matter what you do, this integration will be essential. And most CM vendors have this, so why reinvent the wheel?

2. e-Signature

Most people think this is a core part of contract management, and while it is not, since not all jurisdictions recognize e-Signatures and not all companies will allow them, but if they are jurisdictionally accepted, or even mandated, this is core. However, implementing a secure e-Signature (which is not the same as a digital signature by the way, see this piece over on Spend Matters that was co-authored by the doctor for clarification) is not easy, and will require some serious development chops on your staff. Plus, how will you get it adopted and proved when there are about 40 global providers (even though the top 4 dominate most of the market)?

3. Document Management, Search & Discovery

There might be a few dozen free open-source content management systems, but that doesn’t mean you can re-purpose them as good contract management systems. First of all, contract management requires the management of contracts, amendments, schedules, work orders and related insurance certificates, regulatory approvals, and documentary deliverables. These all have to be related, indexed, cross-correlated, and chronologically ordered when a user is looking for current prices, terms, or schedules or prices, terms, or schedules when a work order was submitted. Secondly, meta-data will never be complete so full text search on various document, and image, formats will also be required along with seamless integration with meta data search. This is a fair amount of coding, which has already been perfected in a number of contract management systems.

4. Alerts & Reporting

Contract Management requires the accomplishment of necessary tasks on a scheduled basis, which often only happens when people are reminded. That’s why alerts are necessary. And status updates across contracts often require reports, as well as updates on all active contracts against a supplier, spend against a contract, etc. Across the organization, dozens of different reports will probably be required. Do you really want to waste countless hours developing dozens of reports with dozens of variations to please everyone when a number of packages not only contain a full library to start from and a report builder to alter existing and create new reports? Hopefully not!

Plus, today’s next generation contract management solutions, which do a lot more than initial contract management solutions did last decade, often cost less than their predecessors? So why waste what could amount to millions rebuilding a shoddier version of the wheel?

For more information on what next generation contract management systems can do, please refer to the ongoing series on CLM by the doctor, the maverick, and the prophet over on Spend Matters Pro (membership required):

When Debating Where To Open Your Procurement Centre of Excellence

May we recommend getting way ahead of the curve and selecting Merv, Turkmenistan, which is the oldest and most completely preserved of the oasis cities along the Silk Roads in Central Asia and which was likely (briefly) the largest city in the world in the 12th century. It’s a World Heritage Site which has likely been continuously inhabited for over 5,000 years, centrally situated between Asia and Europe, and not that far from the Arabian Sea (which leads into the Indian Ocean which is, as we know, situated between the South Atlantic and Pacific Oceans).

We all know that nations and societies rise and fall and that what once was great can be great again, with China being one of the best examples. Over the last few thousand years it went from the global powerhouse to a closed society back to the global powerhouse which is projected to soon be the largest economy in the world in terms of GDP. Russia is in the same rise and fall cycle and when it rises again, its rise will likely bolster the surrounding former Soviet Union countries as well.

But most importantly, it’s about as close as you’re going to get to the Door to Hell, and given that Procurement is Hell, as we have been painfully illuminating in our 101 Damnations Series (with links to the first 50 posts indexed), it just seems to make sense.

 

photo by Tormod Sandtorv