Monthly Archives: January 2018

The Real Reason No One’s Buying Your Traditional Contract Lifecycle Management System … Part I

… has not changed in eight years. We’re still in the situation that, to be blunt, many of these solutions can still be built by a high school student with Microsoft Access and mad visual basic scripting skills.

Think about the following selling points:

Centralize all of your contracts

Guess what – so does a file server with a shared root drive.

Automatic Contract Generation from Standard Clause Template Libraries

Microsoft Word Template with some embedded scripts to select the right version of the clause based on product or service category and/or supplier geography.

Quick Query and Custom Ad-Hoc Queries

An access database with the right metadata fields, indexes, and a good script kiddie.

Change Tracking during Negotiation

Microsoft Word (as long as both parties are honest) and a Shareware file difference tool (if they are not).

Secure e-Signature

Usually through integrated DocSign or another e-Sig tool anyway!

Budget/Completion Tracking on regular refresh

Regular status file export from your P2P tool and import into the access database.

Get the picture? The value of a traditional contract lifecycle management solution is quite limited, especially compared to the enterprise price tag it comes with.

The only value SI was able to identify eight years ago was if it real-time integrated with your e-Procurement / P2P solution and be used to automatically check and verify all invoices and time-sheets in real-time against the contracts before they were queued for approval to make sure they were for valid products or services at agreed upon rates.

Since that time, SI has identified only three other true sources of value.

1. Compliance Insurance

A new regulation is coming into effect, or the company wishes to enter a new region or country and needs to comply with a regulation it previously didn’t. Part of this insurance requires making sure that the supply base is (contracted to be) in compliance and/or the products or services it is buying are in compliance. This requires identifying all contracts that relate to the new move, all of those that need appropriate clauses, and all of those that might relate to products or services that need to be automatically checked.

But guess what? This can also be done on the home-grown solution built by a script kiddie with Microsoft Office. If the contracts are generated from templates, you can see which ones *have* the clauses. If the products / services are extracted into the meta-data you can quickly see which contracts have to be scrutinized. Etc.

In the end, there are only two true values that a modern contract lifecycle management solution, and it is still the case that a number of big name solutions don’t have either. What are they?

Come back tomorrow!

How Do You Find Hidden Costs?

We all know that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them … sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin.

But the margin is only one hidden cost. There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find them. So where do you look?

Start by investigating each of the main production costs:

  • raw materials — what are your T1 suppliers paying to the T2 suppliers
  • energy — production always requires energy … but there isn’t always one rate
  • labour — if there is temp labour / contract labour involved, is it market rate
  • overhead costs — facilities, financing, etc. — these could be fixed, or they could not … for example, if the supplier has to borrow to fund operations until they get paid, what interest rate are they paying … and how does it compare to your rate? might be cheaper for you to pay them early in exchange for a discount that exceeds your cost of capital

That’s how you them. So what do you do next?

Come up with a plan to address any costs that look high:

  • if material costs are too high, can you buy on behalf of suppliers at a better rate? can you find alternative materials?
  • if the market is deregulated, can you help the supplier identify a better option? are energy requirements so large a supplier would do better off with its own plant? should you invest in it if there are multiple suppliers in the region paying absurdly high energy costs?
  • should you share labour negotiation and management best practices to help your supplier keep labour costs down
  • if suppliers have a high cost of capital, help them out … reduce their cost, reduce yours; maybe you can identify facility upgrades that would save them money

It’s not as easy as it sounds, but it’s not that hard either. Just takes data gathering and analysis.

Single Tier Risk Mitigation Strategies Don’t Mitigate Risk

… and, in fact, may increase it!

For example, let’s say that risk analysis identifies a disruption risk from southern china with the primary reason being unpredictable transportation due to labour and provider capacity uncertainty. Let’s also say that Procurement decides a good response to the risk is to just triple inventory and instead of working with a 3 week safety stock, works with a nine week. Problem solved, right? No! Problem exacerbated. Why?

Given that production is not likely to notice an issue and raise a flag until they get down to 1 or 2 weeks of stock, simply increasing stock levels is not going to speed up the time in which Procurement is notified of a potential issue. But even worse, if Procurement raises stock levels, chances are Procurement, or the supplier, will increase shipment sizes and send stock less often. This will increase the amount of time before Procurement could sense a problem because if shipment windows increase from 2 weeks to 6 weeks and a disruption happens one day after a shipment, it will be almost 6 weeks before Procurement identifies it, which could be too late for a recovery. Risk increased.

In fact, most mitigation strategies designed at a single tier actually have the potential to increase risk. Let’s take a few:

  • Dual Sourcing
    without careful planning, both suppliers could use the same Tier 2 source
  • Alternative Design
    that reduces / eliminates the need for one rare material in favour of another doesn’t reduce raw material risk of the other material is just as rare or the acquisition / production cost substantially higher
  • Financial Risk Monitoring
    for shakey suppliers doesn’t catch production shortcuts they might be taking to cut costs that increase risk that could result in catastrophic failures
  • Replacement Product Lines
    chances are the replacement product lines share parts and suppliers … you’ve actually increased risk from a disruption, not decreased it

To truly mitigate risk, you have to go multi-tier and work with your supplier to identify the most likely risks, and how to properly mitigate them.

For example, if the risk is:

  • factory shutdown
    you can work with the supplier to ensure a secondary geographically remote location has the ability to recreate the production line quickly
  • transportation shutdown
    have secondary shipment companies, and ports, lined up and ready to go if primaries go down … be ready to truck or rail longer or even airfreight in emergencies
  • financial stress
    the buyer may need to step in and float operations during new production line setup or new product design
  • raw material unavailability
    the options for alternate supply must be known in advance, as with the options for substitute material

But you’re not going to be able to figure out the right secondary location, transportation options, financial mitigation strategies, or raw material strategies on your own. Don’t try. Work with your strategic suppliers and get it right.

A Visual Metaphor …

Is the following a visual metaphor for:

  1. Supply Chain Bloggers at the latest M&A press conference,
  2. Spend Analysis Vendors at Data Mapping and Cleansing,
  3. Sourcing Consultants at Indirect Spend, or
  4. All of the Above?

You Decide!

One Hundred and Thirty Five Years Ago Today …

The first standardized incandescent electric lighting system employing overhead wires, built by Thomas Edison, begins service in Roselle, New Jersey, just a year after Edison switched on the first steam-generating power station at the Holborn Viaduct in London, England.

In other words, while the vast majority of people alive today who were born in a first world country grew up with electric street lighting, it’s not that new. And when you consider the amount of time we’ve been on this planet from a scientific evidence point of view, it’s amazing how far technology has progressed since the delivery of the first stable feeds a little over 135 years ago …