Monthly Archives: July 2016

To “Term” or Not to “Term” … That is the Question


Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their expenditures.

I sometimes hear clients say, “We are leaning towards Vendor ABC because they don’t make us sign a contract“. In most cases, Vendor ABC does have a contract (or something acting as an agreement such as a letter of authorization, etc.); it is just based on a month-to-month term with no termination penalties/liability. Some companies have a knee-jerk reaction to avoid contracts, but while there appears to be less risk in a “no-term” contract, there are risks and rewards for both “term” and “no-term” agreements. Part of the strategic sourcing process is educating stakeholders on the different consequences of contract components such as term. When evaluating what type of contract or what term to leverage for your next agreement, consider these different aspects before negotiating a shorter (or longer) term contract.

Availability of Supply and Criticality to the Business:

Consider the supply management strategy of the category you are working with and where the product/service lands on the axes of availability of supply and criticality to the business. Based on the classification of purchasing strategy for the product or service to be sourced, you can determine if that strategy is best supported by a long-term partnership or a shorter-term, more flexible agreement structure. For example, if you are working within a category that is scarce in the market and critical to your operation, a long term contract is necessary to guarantee supply. On the other hand, if the products you are sourcing are widely available and can easily be replaced, it may be in your best interest to forego a term agreement.

Pricing/Price Changes:

One of the reasons why many companies opt for longer term contracts is to gain deeper discounts and ensure negotiated pricing is held for a period of time. When entering a contract, pay attention to the language around pricing and the supplier’s ability to change that pricing. Month-to-month contracts typically give the supplier the opportunity to raise prices; if you are purchasing in a market with downward pricing pressure, ensure that language also allows price reductions based on the market. Having a short-term contract in a market under pricing pressure may prompt suppliers to reduce pricing to prevent you from moving to a competitor. Likewise, when a market is trending up in cost (whether it be from decreased competition, increased maintenance costs, etc.) it may be prudent to lock in pricing with a long term contract. Depending on the industry, suppliers may offer signing bonuses, rebates, or other incentives when you sign a long term contract; these should be in addition to more competitive pricing in the contract.

Changeover:

Month-to-month contracts can be very appealing because in theory they allow you to simply change to another vendor if you are unhappy with your incumbent. There are certainly plenty of goods or services where companies are able to be vendor agnostic, but there are other categories where the cost to change is substantial. Likely, changing suppliers will (and should) involve a sourcing activity, e.g. RFP or RFQ, and thorough review of other suppliers in the market. After a new supplier is chosen, the transition process can be a relatively simple for some products or services, e.g. ordering IT accessories from another reseller, but can get more complex for others, e.g. migrating network services to a new carrier. If you are unhappy with the current supplier and chose to change, you will still need to rely on them to some degree during the changeover period. Be sure to consider the ease of change before jumping into a short or no term agreement under the assumption that you can quickly switch suppliers if needed.

Flexibility:

The name of the game in short-term or no term contracts in flexibility. Companies may elect to pay slightly higher pricing to have the flexibility to terminate services or purchasing whenever they see fit. This tends to surface when companies are considering technology changes; they have plans to migrate their services to a different technology or platform and the flexibility of a month-to-month contract allows them to change over as necessary without penalty. This is all well and good, but before entering a higher priced agreement or one that allows for pricing increases, consider your company’s track record on executing migration/change and truly exam the pricing risks that can come with flexibility. If the migration will be based on small, incremental change over time, it is likely you can still use a longer term agreement to your benefit. Also examine the reasons behind the company’s need for flexibility: if the concern is around certain SLAs or KPIs, you can try to add termination rights related to these performance levels and still operate under a term agreement.

As you contract for new and existing categories, don’t get stuck using a one-size-fits-all contracting pattern. Where changes occur in the market, category management strategy, or category roadmap, ensure that the contracts you put in place support those changes and allow your Procurement group to perform optimally.

Thanks, Torey.

Societal Sustentation 38: The Sharing Economy


Cookie: Me got some something that you want
You got some something that me want
Put both somethings together and share

Ernie: I’ll take my something that you like
You take your something that I like
Then put both things together and share

Both: One for all, all for one
Sharing every everything and having a ball

Sharing is a good thing. Unless, of course, you are the one who isn’t being shared with (or the one who refused to share).

And, as we discussed in our “Future” of Procurement series a couple of years back, the Sharing Economy is one of the few true future trends of the space. And while the sharing economy is currently in the domain of individuals like you and I, and a handful of small businesses that have latched on, the sharing economy is going to migrate to medium sized business en-masse (driven by companies like Uber). This is going to give these businesses access to the latest and greatest technology and economics of scale that these medium-sized businesses will be unable to acquire on their own.

But just because it could help, that doesn’t mean it will help. Especially if the organization cannot accept, embrace, and form the new reality to its advantage. This means the organization has to 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.

How will it do this?

Identify it’s biggest costs.

Is it the need for specialized equipment owned by only a few select suppliers? Is it the constant LTL shipments? Is it the need for regular day labour?

Identify which of the costs could be reduced with cooperation.

If a group of mid-size suppliers that required the specialized production equipment formed a co-operative and created a production facility based on that equipment that was shared and used to maximum efficiency, that could reduce costs. If a group of suppliers in a small radius band together and synchronize deliveries they can always ship FTL and even manage their own fleet for reduced costs. But unless they can find nearby companies that need day labour at different times, this is not likely something that can be solved by the sharing economy.

Be prepared to lead the charge.

Put together a plan to make it happen. Make sure it demonstrates the tangible benefits to those who will join the cooperative you are about to form as well as outlines exactly what will be required, when, and when the benefits you are promising will be realized. It has to be attractive to all parties you want to join, and has to show your commitment by showing that you’ve thought it all out.

A lot of your peers might want it to happen so that they can compete with the big guys, but very few will want to lead the charge.

Environmental Sustentation 23: Food Shortages

Food shortages are an ongoing concern. They have been since before global food reserves hit a fifty year low a few years ago and will continue to be as global population continues to grow to the point where we will be pushing the planet’s limits (under current technology) to support us. This is scary given that over 800 Million people, 11% of the population, are currently food insecure, as this number is only going to increase as time goes on.

But it’s not just the social viewpoint that is scary, as the corporate viewpoint is also scary. Every time there is a shortage in any commodity, prices spike, and as far as suppliers are concerned, contracts be damned.

If a significant portion of a supplier’s crops are wiped out and it doesn’t have enough to satisfy its contracts, it can claim force majeure, and unless your organization is the one paying the most, it’s going to start by claiming force majeure on you and your supply is out the window.

We’re still in the situation where most crops are grown in fields, and not greenhouses, and this demands the right climate. Sun and warmth, a sufficiently long growing season, an absence of pest swarms, and an absence of natural disasters. But we are in a situation where we have unbearable heatwaves and unexpected cold snaps, both of which destroy crops. Growing seasons are sometimes unpredictable. Pests are becoming more devastating as there is less and less undeveloped green areas for them to feed on. And disasters are in the process of increasing five-fold over a fifty-year period.

So what can you do?

1. Geographically remote sources of supply.

The weather is not the same all over, and most natural disasters are limited to a small geographic area (on a global scale). Thus, if you have multiple sources of geographically distributed supply, the chances of your entire supply being wiped out in a single shot are small. You might lose some supply, but you will still have some supply and with the right supplier mix, you might be able to eek out a bit more.

2. Greenhouses when possible.

Yes, greenhouses have a higher carbon footprint than fields, but some plants grow faster and better in controlled environments — especially certain herbs, fruits, and similar plants. If they have a short growing season, and the greenhouse can be kept at peak capacity, for certain crops, this can actually be a better, more reliable, option.

3. Waste Not, Want Not.

Strive for 0 waste in the food supply chain. In an average food supply chain, up to 30% (or more) of food is wasted during picking, transportation, and processing. This is not a made up stat — according to the United Nations Food and Agriculture Organization (FAO), a third of the food currently produced never reaches our plates (Source). Invest in efficient harvesting techniques, proper storage, proper transportation, and low-waste processing technology so that this statistic is reduced from over a third to less than 10%. (The goal should be zero waste, but that is hard. However, reducing waste by two thirds is not. Start there, and improve over time.)

4. Variety.

For example, there are hundreds of natural varieties of tomatoes, beans, and other plants. Don’t restrict your recipes and buys to a single variety … diversity, and you will have a better chance of assured supply.

5. Be Prepared for the Worst.

Always have backup plans and alternatives. Some product lines might have to be temporarily suspended, but others can be brought in to fill in the gaps.

Where’s the Beef?

There are a lot of fast food chains, and a lot that tried to make it big enough to take on the grand-daddy of them all, McDonalds, which has sold hundreds of billions of burgers across 36 thousand plus locations since the opening of its first restaurant in 1940. One chain that hoped to take them at their level was Wendy’s, founded 29 years later in 1969 and which has since grown to over 6 thousand plus locations worldwide, with a rapid expansion that took place in the mid-eighties, about the same time they launched their classic “Where’s the Beef” campaign (which tried to demonstrate their value by focussing on the fact that they used a bigger beef patty in their main burger as compared to the two big competitors they were taking on, which they claimed used massive buns to disguise smaller patties).

This was not only one of the best campaigns of the decade, but of the twentieth century as this classic catchphrase has progressed into everyday use and is now universally used in the English language to question the substance of an idea, event, or product.

And, as such, this is a decision we should be making as Supply Management professionals every time we select a product, supplier, or partner. Because only a product, supplier, or partner with “beef” deserves our money, and only one with “prime beef” deserves top dollar.

So how do you find the beef?

The first thing you have to do is define what “the beef” is and when you are evaluating a product, supplier, or partner — strip away everything else. In automotive, high-tech, and defense, it’s typically quality and reliability. The bolt can’t break, the processor can’t overheat, and the interface has to be suitably shielded to prevent interference or hijacking. Cost is important, but not paramount, services are useful, but not critical if there are third parties, and warm fuzzy feelings don’t amount to much if a product breaks and someone dies as a result.

In services, it is all about the efficiency or the effectiveness, depending on the type of service being put to bid. If it’s for tactical data processing (such as invoice entry, verification and correction), it’s about efficiency. You want as many invoices converted into verified electronic format for automated m-way match as quickly as possible. If it’s for marketing media, you want services that generate campaigns that are as effective as possible — every eyeball and lead effectively reduces the cost and increases the value.

Then you create a scorecard that evaluates the product, supplier, or partner on the “beef”, and compare all such products, suppliers, or partners on the weight of the “beef” and only the “beef”. Any that don’t stack up are eliminated. Now you have the beef.

Then, and only then, do you do a full 360-degree scorecard to figure out which cut of “beef” is the best for your business. A lot of supply managers try to evaluate too much too soon, and spend too much time evaluating the bun and end up making an inferior supply chain decision as a result. So in your next evaluation, remember to ask “Where’s the Beef” to stay focussed.

With Currencies Crazy, Is It Time to Return to Barter?

This is more of a question / thought experiment than anything else, but it’s a good question.

Brexit has thrown the British pound into chaos again. (Nothing new, it’s happened before, it will stabilize eventually, but it will happen again.)

Canadian and Australian dollars have recently made substantial declines from highs that put the dollars almost on part with the American dollar to lows that put it a mere two thirds to current values around the three quarter mark.

The Greek financial crisis is still ongoing and could threaten the Euro further.

And so on.

An organization enters a long term (multi-year) contract with an international partner under the expectation of value, an expectation that is crated based upon a current and projected currency exchange rate — which can change radically overnight when a single country, or in some cases, a single bank, decides to do something extremely unexpected or extraordinarily stupid.

All of a sudden costs can double. That’s considerably more fluctuation than is in the reserve budget.

But what if there was no exchange of currency. What if it was an exchange of a raw material or service for another raw material or service, where each raw material or service came from the organization or a partner in the same country. Since the value of a product or service, adjusted for inflation, is relatively constant over time and since the relative value of one versus another is also relatively constant over time, such a contract would not be subject to rapid changes in value differences regardless of what happened in the currency markets.

Now, you’re probably thinking that this wouldn’t work — you buy from X and don’t sell them anything, but who do they buy from and what do they buy? And what do their downstream partners need? Remember, they have bills to pay too and if their supplier requires a raw material in abundant supply that could be supplied by one of your customers, that has to pay you anyway, all could work out.

For example, just because you’re buying rare earth metals for electronics manufacturing, doesn’t mean bartering is off the table. The rare earth metals provider, which provides a refined metal, might be buying from a mining company that is part of a conglomerate owned by a single company that requires specialized mining equipment on a regular basis. One of your biggest customers could be a producer of this equipment that buys all of its hardware and associated services from you. If you arranged for payment in mining equipment of your choice in today’s dollars, and the seller was happy with that conversion, you could pay in mining equipment over time, regardless of how your relative currencies rose and fell.

This might not have been imaginable years ago given all the supply chain visibility, data, and optimization models that would be required to identify the right value-generating deals that could keep costs constant over time, but with modern supply chain systems that enable visibility from the raw material to the end customer, all supply relationships, demands and spend, and multi-level optimization models, this is now a reality. And currency risk could effectively be made a thing of the past in large, critical categories. It could require more multi-party agreements, but if all parties benefit, why not? It’s not like you have to courier contracts around the world — create a secure collaboration portal, agree, e-sign, and you’re done.

Now, just like buying on behalf of the supplier to get lower costs through greater volume leverage is still only done by the leaders, SI expects that this is something that only leaders would do for at least the next decade, if it was done at all. What do you think? Will leaders catch on?