Author Archives: thedoctor

CSR, Procurement and North America: Creating a Market

In our previous article, we asked if you could solve the modern compliance challenge, and, more specifically if you could do it with Ecovadis. This is because compliance has morphed over the past few years from insuring you weren’t doing any illegal trading and simply satisfying the tax man (and import/export compliance is essentially just respecting the legality of the country you are trading with and satisfying its tax man) to having to comply and deal with a lot of regulations around financial reporting and global trade to having to respect the environment (pretty much everywhere but the US, with the exception of California) to having to take corporate social responsibility for the organization’s entire supply chain and ensure there is no violation of worker’s rights, child labour, or human trafficking — or face the consequences that can not only include bad press (at internet speed) and large fines but, in some countries, criminal charges against the officers of the corporation.

We also noted that solving the compliance challenge was tough because you needed environmental data, sustainability data, social compliance data, and even third party audits on your suppliers, and sources of this data (outside of internal surveys that were unverifiable without site audits) were few and far between. The few players with even remotely recognizable names that exist are in Europe, and Ecovadis is the largest. As a result, it likely has the best shot at championing a market in North America, especially with its increasing partner footprint, supplier database (with over 55K assessed companies), and global reach (as they cover suppliers across 155 countries).

But Ecovadis is not a household brand in North America. To become one, it really must drive material commercial traction outside of the EU and, most important, prove that the market for CSR ratings and compliance in North America is as central to supplier management as other supplier management initiatives (e.g., risk, EHS, etc.) to truly “go global”.

The case for an Ecovadis model is sound. Most major procurement departments at US F500s and larger mid-size companies are still focussed on cost-cutting. And using Ecovadis to get the sustainability data the organization needs is roughly 20% of the cost of trying to do it in house.

Further:

  • Organizations that are embarking upon more strategic category management want deep supplier information before selecting potential strategic suppliers and the response rate to Ecovadis-initiated assessments is 90%
  • The average organization will struggle with a 70% response rate in such initiatives, especially when you consider the average supplier turn-over (as identified in a recent QIMA survey) is 27%
  • Once a supplier is in the Ecovadis network, the chances that their overall CSR rating will improve on their next (annual) assessment is 64%
  • For an average company, unless they initiate a supplier development program and work with the supplier, the chances the supplier will otherwise improve on their own is, as we all know, closer to 6.4% than 64%

Less money. Better results. You’d think it would be an instant buy, but it’s not. So why. Is it because it’s European?

Not necessarily — Jaggaer One+ and Jaggaer One Direct from Jaggaer, which is one of the S2P juggernauts, has good NA penetration, and those solutions (formerly BravoSolution and Pool4Tool) are European.

So that’s not it.

Is it because the space is new or unproven? Can’t be. Ecovadis has been around for 12 years and Sedex Global for 18. Plus, there are a number of other players in the space. Is it because the solution is not user friendly? No — it’s delivered via a simple SaaS platform and they even have public quotes from F500s to that effect. So what’s the problem?

North American companies.

First of all, with apologies to Spike Lee, many will “only do the right thing” when they are forced, and then only to the extent necessary (although this may be changing).

Second, they’d rather profit today than save tomorrow (even if the long term savings would be multiples of the short term profit gains). This means that for them to invest in a solution, they want to see a large, immediate, sometimes unreasonable ROI.

Third, they tend to only act when they’re scared (e.g., losing budget if they have extra).

This means that, unless something changes, for Ecovadis to create a true market in North America with a similar reasonable TAM for say, the compliance management side of supplier / contractor management, it will need to lead with evangelism and, perhaps, more.

All things are possible. But as Vincent Ngo speculated decades ago, it takes a superhero to change the mind of the corporate culture. Can Ecovadis be that superhero?

For the sake of procurement and a better world, we hope that they’ll do it — or someone else.

For more information on Ecovadis, check out Spend Matters’ recent post on Catching Up on a Provider to Know (which also includes links to a deep 3-Part Vendor snap-shot co-written by the doctor and the maverick).

Can You Solve the Modern Compliance Challenge? Can Ecovadis?

Compliance used to be easy. Collect the tax information. Make sure the other party is not on a denied party list. Don’t buy or sell a restricted material without the right permits and don’t buy or sell a banned substance. Done.

But then came globalization. Now you had to collect information for import / export requirements. Satisfy a new slew of tax regulations. Comply with additional inspection and security requirements. Track all of the restricted substances, denied materials, and denied parties of another country. And then as supply chains lengthened and ships made multiple port stops, multiply these requirements.

And that was manageable, but then came a new round of financial regulations, like SOX, in the wake of corporate meltdowns (like Enron) which made compliance more cumbersome. And that was somewhat doable. But with the global penetration of the internet, news spread faster and faster and the unsafe and sometimes inhumane working conditions that outsourced providers were comfortable with made the news regularly, the dangers of poor “recycling” efforts which just saw almost toxic waste dumped on mass to ill-equipped “recycling” centers, and the use of slave/child labour where it was not known before.

As a result, ethical countries started implementing laws on environmental protection, dangerous substances, especially around recycling and disposal, ethical and safe working conditions in the supply chain, and even anti-trafficking and anti-slavery laws — all of which the last link in the chain, the end buying organization, was responsible for.
This makes compliance a bit more tricky. There’s lots of data on financial performance and financial risk, certifications, import/export, and even public sector performance data, but when it comes to corporate social responsibility — environmental compliance, worker’s rights, anti-trafficking, and so on – where do you get that data. Not D&B. Not BvD.

This is where a new generation CSR player comes into play – one that tracks environmental data, sustainability data, social compliance data, and third party audits. But there aren’t many players here yet, and Ecovadis is the largest. But will they be able to take their European success and globalize? While there are a few other players in Europe (Sedex Global, FLO-CERT, e-Atestations, etc.), there are few, if any in North America.

Ecovadis likely has the best shot, especially with their ever-increasing partner footprint, but they need to be the first to scale and win over the hearts (and wallets) of global procurement organizations, especially those in North America, which generally are not as advanced around CSR tracking compared with their European counterparts. The road ahead will be interesting to watch.

Reuse, Recycle, Re-manufacture … Now! (Updated)

Sourcing Innovation has been promoting sustainability since the beginning and design for recycle since the very early days, which is essentially what you are doing if you are designing for remanufacturing, which is taking way too long to take hold in the manufacturing sector, with even fashion poised to overtake it (considering H&M and Zara are not only taking back clothes, but working on technology to create fabrics that can be more easily reused in the future).

When you think about the average complexity of today’s consumer products, especially in electronics, it becomes clear that when a product breaks, it is typically only one component that is broken and a replacement of that component makes the product useable again. That’s why a lot of computer, tablet, and phone manufacturers have entered the refurbishment business — once the damaged or defective part in a product that was returned under warranty or reclaimed upon disposal by a customer, it can be reused and, more importantly, resold.

But the concept doesn’t end with electronics, and doesn’t end with refurbishment. Electronics can be designed more modularly with re-manufacture in mind, so that parts can be upgraded en-masse when the products are returned en-masse in a regular upgrade cycle. For example, if laptops were designed for easy replacement of not only memory and drives, but processors and peripheral connectors (in anticipation of USB 4, Thunderbolt 2, etc.), the previous generation models could become the next generation models and resold as either lower-end offerings in the same market or new offerings in a foreign, emerging market.

And automotive suppliers, who not only know that parts wear out, but when parts are likely to wear out, and which parts wear out together, could not only design their engines to make it easy to replace parts, such as spark plugs, batteries, belts, filters, and pumps that wear out quickly, but also the engine block as a whole, that is going to wear out in 7 to 15 years, depending on the average annual mileage, if the rust-proof frame can last for 15 to 30 years. Given the choice, many people on a fixed income (who don’t live by the ocean and have rust to worry about) would rather replace the engine for 3,000 to 5,000 and keep the car for another 7-10 years if the frame is fine than pay 25,000 or 30,000 for a new car. And while this may not look as attractive from a bottom line perspective to a manufacturer, it significantly reduces the chance of the customer migrating to a different car company, which is very common if a competitor is offering a significantly better deal on a comparable car.

Plus, if the components are themselves designed for remanufacturing, it will be relatively easy for the manufacturer to reclaim the raw materials from the damaged or defective components, which is where a lot of the cost comes in, especially if we are talking rare earth metals. For example, the price of praseodymium-neodymium oxide exceed 1.70 an ounce and prices of terbium oxide (a semi-conductor that is used as an activator for green phospors in colour TV tubes) exceeded 112.00 an ounce this summer, and it keeps rising!  Gold, a metal used in many electronics products, is now hovering around $1500 an ounce. And while there is not much gold in a single laptop, when you put fifty of them together, you’d likely get an ounce. And given that there are roughly 100 Million PC laptops and computers sold a year, that’s close to 2 Million ounces of gold that need to be reclaimed!

And, as per a now classic green & clean article, remanufactured products offer cost savings in the 45% to 60% range! So if doing the right thing isn’t enough, that should be enough of a justification to invest in remanufacturing! This goes double if you are in electronics (for some of the reasons given above) or automotive, where the global market for remanufactured auto parts is projected to reach $91 Billion by 2026. (Source:
Persistence Market Research)

So, regardless of what you want to call it, it’s time to do it. It’s not just good environmental stewardship, it’s good economics.

Futurists are Still Stuck in the Past! Leave them there!

And the reasons are the same as they have always been.  (And the doctor just wishes they’d stop speaking at the events he has to go to.)

  1. They Have No Knowledge as they come from different backgrounds which offer them no education or experience in Supply Management.
    Just because you can get high, have psychedelic visions, white them down, and spin a good yarn doesn’t mean you can be a futurist. A poet, sure, but not a futurist …
  2. They Have No Vision beyond what the rear view mirror (or the hydrocarbon gas from the bituminous limestone) offers them.
    When Meatloaf said “it was long ago and far away and it was so much better than it is today“, he was referring to newly discovered young love, not business processes identified 30 years ago …
  3. They See Too Many Organizations Stuck in the Past and a few organizations (in the Hackett top 8%) ahead of the pack and they think they can peddle these best practices as future vision.
    This is not 1914 (which was 12 years before the first transatlantic telephone call) where good ideas take years to spread (and the first person to bring a new idea or technology from a different continent can make millions on someone else’s work) and a career can be built on one single improvement — this is 2019 where it only takes a few seconds for a story to be spread around the world. But I guess if you can’t look beyond the rear-view mirror …

So, why are so many organizations still stuck in the past (and fueling the flame that powers these fantasy futurists spinning the same yarns they spun five years ago and driving the doctor mad)? There’s a few reasons, and they include:

  • Lack of Education
    Many Supply Managers were simply thrust into the role, with no training or background for the role. And despite the fact that they have some competence or experience in other areas, they are so ill-equipped and ill-prepared for the role that they might as well have been dropped in The Lost World.
  • Lack of Resources
    Most Supply Managers are overworked (and underpaid, but who isn’t these days) and resource-constrained, with no time for training and no budget even if they had the time (or would sacrifice their few remaining free hours to get better and more efficient so that maybe someday they can take a whole weekend off).
  • Lack of Clarity
    With no formal education, no training, and no resources to make sense of the barrage of BS being thrown at them by futurists and analysts alike, how can they differentiate between current and past processes and technologies and what they need to embark on a path that will ready them for what comes next?

And the third reason is the most crucial. Until they get some clarity, Supply Managers are going to continue to be taken in by modern con-men (who include 2nd rate analysts, consultants, and salesmen of outdated technology) selling them silicon snake oil when they just need modern sourcing and procurement tools that fit their workflow and daily needs.

That’s why SI is here – and why the doctor co-invented (and single-handedly developed the sourcing, supplier management, and analytics) Solution Maps which grade a platform on functional capability only — not subjective vision, market size, arbitrary inclusion parameters, and other factors that are easily embellished or hidden behind a smoke screen.

So if you want a vendor who can help you, chose one based on solid capability.  And if you want an analyst that can help you, choose one that bases recommendations on real data.  Then you will make progress.

Aspects of the Tax Efficient Supply Chain

Many companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts — especially now that tariffs are skyrocketing and you need every source of savings you can find.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact income-based taxes), it has far reaching implications. Furthermore tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that have been noted on this blog in the past include the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states / jurisdictions, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications.

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information.

    • there are state income tax implications wherever such data is stored and maintained.
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items
  • identifying taxes that can be reclaimed

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made or the corporation is entitled to a tax rebate / refund
  • greater certainty regarding tax requirements

So get tax efficient. And maybe you can at least counter all of the duties and tariffs being imposed in the trade war.