Monthly Archives: July 2018

Maybe It’s Time You Go Direct … Part II

In our last post we noted that most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings — at least initially. After a while, the savings dry up, and unless an organization acquires an advanced optimization-backed sourcing platform, they’ll disappear entirely. (And even with such a platform, the returns will shrink over time.)

The organization will hit a brick wall, unless it goes direct. Why?

Because going direct is the only way an organization can get true insights into the costs, and opportunities, associated with each product it sources. Because, when you get right down to it, there is no indirect sourcing from a product perspective — your indirect is someone else’s direct. And if it’s indirect for your provider, you’re just paying a handling fee to a third party to handle purchase from the source and transportation to a locale closer to you (because you don’t want to deal with import / export, remote suppliers, etc. etc. etc).

And, more importantly, as direct manufacturers know well, up to 80% of product costs are locked in during design finalization and/or product selection. So the only way to take costs out is to understand what costs are going in. But when you go direct, you create detailed should cost models. You tie them to material costs and component costs defined in a bill of materials and roll up the costs with overhead production costs and understand precisely what a product should costs and whether a bid is in line with expectations. This way you know when quotes are higher than they should be (possibly due to collusion), when they are inline with expectations, or when they are lower. If they are inline with expectations but higher than you need them to be, you can understand what the cost drivers are. Then you can ask suppliers to identify designs with alternate materials, or at least less of the high cost materials, and then select those suppliers who will work to bring costs down. If the costs are lower, you can interrogate the suppliers to find out why. Do they have a lower cost source of raw materials? Are labour or energy costs significantly lower than usual? Or is the specification the supplier is quoting toward not up to snuff? The latter is extremely important — it can prevent a purchase of a poor product that could cost the organization dearly.

The power of a direct platform for continual cost insight, and cost saving, is incomparable, especially when compared to an indirect platform. And there’s nothing a direct platform can’t source. It’s the harder sourcing project — indirect is just a bill of material with one entry. And a service project is just a roll-up of service line items.

So why don’t you have a direct platform? Sure, most platforms, including the one you’re using, don’t make the cut, but some of the newer up and coming platforms do, even the S2P platforms. For example, Synertrade has been able to do direct since day one. Ivalua acquired DirectWorks and is integrating direct into its native end-to-end code base. Jaggaer acquired Pool4Tool and has been working on a universal data model (& bridge) to link it to its indirect platform. And even Zycus can suck in a BoM (although it can’t do BoM management) for sourcing purposes.

So go direct. Finance will thank you.

Maybe It’s Time You Go Direct … Part I

Most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings (as most of these organizations spent all their time and effort on direct sourcing). Why? These were typically the least well managed, and the most bloated, categories and simply inviting more suppliers, who had to complete a pre-defined RFX that allowed for apples-to-apples comparisons, pushed prices down, and if the market conditions were right, auctions pushed prices down further and it was not uncommon to find a number of categories where 20%, 30%, or even 40% savings could be found during the first event simply by squeezing the unnecessary fat out of the margins.

But this is the very reason why the first generation sourcing platforms boomed and busted, and why auctions rose and fell in an average organization during the noughts. The organization would save a huge amount the first auction, typically at least 15%. They’d then save a respectable amount during the next auction, say 5%, because all the suppliers came back with their pencils sharpened ahead of time. But the third auction would fail miserably, and most of the time prices would increase. Once all the fat is squeezed out of the margin, competitive RFX or auction will not save any more and, in fact, over time, inflation will creep in, the supply/demand imbalance will shift, and, without something new, costs will rise.

The next step, if the organization is analytical, is generally to bring in analytics, identify the categories with the best opportunities due to market price trends, supply/demand imbalance, or sheer volume leverage the organization had. Careful picking, even if the category was sourced twice, or thrice, before will still lead to some savings. At least once.

And when those savings run out, then you look at optimizing TCO when all costs, discounts, transportation costs, discounts, and associated lifecycle costs are modelled. You build your risk mitigation rules and by splitting the award, choosing the carriers and lanes carefully, and just being smart, more savings materialize. Typically over a few events as your volume leverage increases, your sophistication improves, and your events get bigger.

But there’s always another brick in the wall, and you’re always going to hit it. Unless you go direct. Why? Guess you just have to come back for Part II!

Spend Rappin’ … The Sequel

Now don’t you give me all that JIVE about code I used before you’s alive
Cause this ain’t nineteen ninety five — ain’t even two thousand and five
Now I’m the guy named Lamoureux and Spend is the one thing that I know
So every year, in summer time, I’ll celebrate it with a rhyme!

Gonna save it, gonna shave it, gonna make it good,
Gonna take it all down through your neighbourhood.
Gonna wring it, gonna sling it till it’s understood.
My rap’s about to happen, like the knee you was slappin;
Or the toe you been tappin’ on a hunk of wood.
‘Bout a two fisted dude, with a friendly attitude
and a sack full of savings for the people on the block.

He’s an old grey beard, maybe looks kind of weird,
and if you ever seen him he could give you quite a shock.

Now people let me tell ya about this guy
the dude who’s still slicing spend through July
Now his wit is out, his gloves on the ground,
best you stay to watch him cut it down.
When this dude gets to work on your spend block,
you will be glued to just one spot,
as the master works at a solid pace,
…
get a taste of the waste thrown in your face.
…
this old spend slayer will lay down a heavy layer
of his spend mapping rhythm to a cross-mapped beat
he don’t need no database, just a chunk of spend to trace
and a family of vendors that will roll up neat

I was in a quiet mood, which was good for a brood
as not a sound did abound as he ploughed through the mound

and you will utter a gasp as he slices through the past
lays your mav’rick spend bare faster than a white hare
while you’re up in the attic dealing with the static
that your current spending tool is programmed to give
he’s got an all new app that don’t give a cr@p
about where your data’s from or what form it is in

It’s quick, it’s sharp, and always on the mark
Delivering success on his chinny, chin, chin
it does away with “cubes”, and OLAP attitudes
and treats the spend as a set to be mapped on whim
He’s cool for a fool throwin’ out every rule
every hour of the day when the hot sun shines
Though the beard was-a cleared, I still have never cheered
like I did on that day when he discovered cloud nine

You know I’m right, your spend’s a fright
you need a guide to help you lay it out right
So if you ask him nice, once or twice
he might just show you the hand of sleight
How he syncs disparate data in real time
Whether ERP, Flat File, or API
Without AI or one hundred thousand rules
At a speed that’s so fast, no time to drool

When he gets down to work, this fine old gent
Whips up live reports that are heaven sent
Built on cross-linked filters that stay in sync
As he cross-drills down through multiple data sinks

There are just no words that are fit to describe
How this expert makes your data come alive
The tricks he employs are out of the realm
Of what you will get unless he’s at the helm
You’ve just never seen spend insight like this
When you map your data with his clever twists
Your old Ford engine is now a Mercedes AMG F1
The power at your fingers is second to none

This old spend dude never left the keys
up late till all’s where it should be
But if he were posting here today
he’d say Truthful Spending and to all a good day!

Long time readers know that Sourcing Innovation used to have a Spend Rappin’ holiday tradition until Opera Solutions Acquired BIQ. But even that couldn’t stop the old spend dude, who, after some time off and some contemplative thought, got back to the keys and came up with a whole new approach for do-it-yourself spend analysis that is really so easy your grade schooler could do it (and, sadly, probably do it better than you).

If you haven’t checked it out yet, check out Spendata. As per the doctor‘s deep dive over on Spend Matters (Part 1 and Part 2, registration required), it really is a leap forward in D.I.Y. Spend Analysis. Easy creation and propagation of views using a new concept called filter coins, no more static reports (as every view is a report that can be exported at any time), and no more traditional time-consuming ETL — map, cleanse, enrich on the fly, in real time, in any sequence you like, across any data sets you like, and cross-join and sync ’em all using whatever scheme makes sense to you. Nonsense you say? All we can say is this isn’t grandpa’s spend reporting tool.

It’s Christmas in July. Hence our new Spend Rappin’ tradition begins!

Is Your Organization Serving the Right Market?

If your Supply Management organization is part of a global multi-national, chances are that it has been buying from China and selling to the U.S. for years. And, for a few of you (in heavy machinery, luxury goods, etc.), chances are that your Supply Management organization is producing Made in the USA goods and selling these to China. But should it be?

Ignoring the fact that rising costs in transportation and production (due to raw materials and the inevitable rise in labor wages) coupled with the decline of the US dollar often make sourcing close to home (in Mexico) or, when possible, at home cheaper than off-shoring, especially when quality and risk-related costs are taken into account, now that Trump has brought back the trade wars, much of those savings are flying out the window faster than a Peregrine Falcon diving for its prey. (If you’re not sure how fast it is, Google It .) So, as we have been posting recently, you really need to rethink your global supply chain (and possibly look to Russia, Turkey, etc.).

And, despite the headlines being made over the move, look to copy Harvey Davidson and shift production of certain goods (closer) to the primary markets they are being sold in. (Bureaucrats can threaten higher taxes all they want, but unless laws are passed through both houses and signed by the President for the tax category they are in, nothing can be done. And as long as the move doesn’t change the structure of the company, the only result will be a lot of hot air and wasted words and a temporary drop in stock price. In other words, don’t move all your production out of a market, especially if you are selling in that market, or even the majority, without checking with your accountant and lawyer first.)

Because, if you buy and sell in a market, there are no import or export tariffs, and the way the trade wars are going, this is a big savings and an opportunity to claim more market share if you can sell an equally desired, equal (or better) quality product for a lower price due to a smarter supply chain design that keeps your costs down. For example, I don’t think anyone in Europe would mind if Harley said it was staffing its European Facility with German and Austrian trained Engineers but keeping the authentic American designs. In fact, the bikes might even become more desirable as German and Austrian Engineers are often seen to be the best in the world.)

And if you’re selling overseas, especially to China, producing overseas, or in China, makes sense. We don’t often think about it, but, due to population and wealth (around 15% of GDP now), China is the world’s largest consumer of automobiles, motorcycles, mobile phones, luxury goods, and shoes and at least the world’s second largest consumer of home appliances, consumer electronics, jewelry, and the internet (based on data that is a few years old, but all trends were rising). Thus, if you are in any of these industries, why not produce in China for China?

Remember the facts. China, which is the world’s second largest economy, is approaching 1.3 Billion people and an emerging middle class flocking to urban areas. A recent McKinsey & Company study had over two thirds of the Chinese population as middle class and predicted three quarters would be by 2022. And about 56% of the population has internet access, with most of these individuals having broadband access in their densely populated urban centers. In fact, China is estimated to have close to 100 cities with a middle-class population of 250K or more. The US and Canada combined have less than 70 such cities.

And India is growing. It’s GDP is now almost half that of China’s. And while it’s middle class population isn’t nearly as large yet (as it has almost as many people as China), at about 21%, or 270 Million people, that’s still at least 50% more middle class than in the United States!

And South Korea’s GDP has more than doubled since the turn of the millennia. In fact, an article from 2015 predicted they’ll have a better standard of living than the French by 2020, with an adjusted GDP per capita (PPP-adjusted) heading towards 50K. Right now, the average annual household income is 48K, which is only 20% less than the median household income in the US! At presents, two thirds of their households are middle class, the average household has one child and dual income, and both earners University educated. Talk about consumer marketer’s paradise!

In fact, when you look at all of this, maybe you should just relocate your company to Asia, make the US a subsidiary, streamline operations to produce just what you need for NA in NA, and focus on Asian growth. Seems to make more sense, doesn’t it?

Not All Consulting Advice is Good, And Their Understanding of Tech Varies Wildly!

In yesterday’s post we pointed out you need to be very, very careful what advice you take from consultancies, large and small alike, who aren’t really expert in modern Supply Management processes, best practices, and technologies.

Yesterday’s post covered a recent piece (from a mere two months ago) on Sourcing and Purchasing Transformation that provided such bad advice for weathering the rough seas ahead that we were serious when we said the advice was equivalent to sailing right into the heart of the Bermuda Triangle in the middle of a category 5 hurricane! Maybe the advice was good in the 80’s when everything was home or near-shored, innovation was slow, the economy was more stagnant, and cutting cost to the bone was the only way to survive. But that was then. This is now. Three decades later. And anyone still peddling that advice in today’s fast moving, outsourced, global economy is seriously out of it (or trying to create more work than they can handle by putting in peril any supply management organization that actually takes that advice).

But we digress. Today’s rant is about the Big 6 / 8 and their dangerously low understanding of S2P technology and their unfounded (and unfathomable) belief that you can somehow measure capability and/or innovation based upon market value, customer count, or investment dollars.

For instance, the doctor was just sent a brand-new paper by ATK on The Future of Procurement Technology and how Mediocrity is No Longer Acceptable (and it is NOT) by the way, where they correctly noted that

  1. Today’s Procurement Technology is a Failure
    which it generally is as most solutions that have been implemented don’t give a full view of spend, don’t address many of the day to day needs, and, frankly, just don’t work
  2. Suites are Problematic
    as most are built through acquisition and all the components don’t really talk or sync
  3. Most solutions are archaic, rigid, and poorly thought out
    and push users into the wrong decision and
  4. A revolution is coming

… but not all fighters are created equal!

In particular, they name eleven (11) companies that represent the most current and advanced technologies, but their is almost no comparison between the extremes they represent.

For example, even though Scout has the fourth largest investment raise of all the companies listed, it’s one of the weakest offerings in the list. And even though LevaData is one of the lowest raises, it’s one of the strongest offerings.

And while you can barely compare the likes of Scout and Bonfire (traditional e-Negotiation based Sourcing with a much better UX than last generation systems), who have the lowest solution scores on the (deep) Spend Matters Sourcing SolutionMap, to the likes of LevaData, Suplari, Supplier.ai and Xeeva (who are bringing in the era of Cognitive Sourcing and Procurement), there’s just no comparison to the likes of tamr (with its advanced machine learning capabilities for which there are few equals) and Concord (which is in the field of contract automation).

Plus, when it comes to contracts, consider what the likes of Seal and Exari are doing. Moreover, when it comes to analytics, don’t discount Coupa AI-Classification (formerly Spend 360) or AnyData. And why are there no true optimization vendors on the list like Coupa CSO (formerly Trade Extensions TESS) or Keelvar, that is trying to apply AI to true optimization-backed Sourcing. And when it comes to Supplier Discovery, Supplier.ai is one option, but Tealbook is another.

In other words, they have some names. They have some investment figures. They have some insight that each is doing something different, that each is trying to revolutionize something about the industry, but no real insight into what the core of the difference is or the strengths they bring.

And while this may not seem too dangerous, as they aren’t really reporting each is equal, just that each is revolutionary, in the hands of a half-wit, or even worse, someone with an incomplete understanding of tech and best practice, they could take this as a guidebook to the best vendors, and, in the end, select the absolute worst vendor for them. One has to remember it’s not just about revolution, or even evolution, it’s about the platform that solves the Procurement department’s greatest needs. Today. And when the needs are met, the platform that offers the greatest flexibility and power for the organization with respect to their goals.