Category Archives: Best Practices

Supply Chain 2020 – What Will It Take to Get There?

I’ve been noticing an uptick in Supply Chain 2020 discussion and blogging lately, despite the fact that 2020 is only 7 years away. Why do I say only? While 2020 may be 28 years away in ‘Net Time, given the pace at which the average Supply Management Organization moves, that’s breakneck speed! (It shouldn’t be, but it is. That’s why, despite the fact that it’s 2013 and e-Invoicing is old enough to drink, approximately 90% of invoices are still paper-based.) Furthermore, most prognosticators want to make predictions that are far enough away that either their prediction will almost guaranteed to be a reality by that time or everyone will have forgotten completely about their prediction by then. (Given the rate of increase in ADD/ADHD in recent years, that might be long enough for all of us to have forgotten everything from today, but I’d like to think that some of us may still have a long-term focus, and a longer-term memory, in 2020.)

A lot of these discussions are focussing on what the Supply Chain is going to look like in 2020, what technologies are going to drive it, and how the Supply Chain is going to run. These discussions are interesting, because we all want to know what tomorrow is going to look like today, but it’s not 2020 — it’s 2013. And whatever vision you have of 2020 is not going to become a reality without a plan to get there. That plan will, of course, depend on your vision and your end goal, but regardless of the plan you choose, there are three elements that will be required to get there.

What are these three elements? The Three Ts of Strategic Supply Management, of course!

  1. Talent
  2. Technology
  3. Transition

No innovation, or renovation, will succeed without these 3T’s, and an alignment thereof.

Despite the need for transportation, Supply Chains don’t run on trucks and trains — they run on Talent. Talented people identify potential suppliers. Talented people run strategic sourcing events. Talented people negotiate and execute contracts. Talented people collaborate with supplier personnel to ensure quality, on-time delivery, and quick issue resolution. Talented people deliver to Sales and Marketing what the consumers want.

And what do these talented people use to accomplish their tasks? Technology. Real-time communication with suppliers around the globe requires modern technology. Value-generating strategic sourcing events require good strategic sourcing technology. Contract generation, management, and supplier performance management requires good collaboration technology. And the list of technological needs goes on.

However, the technology that is required, for most organizations, is not the technology that the organization currently has. In order to acquire and implement this technology, the organization will have to transition appropriately. This will involve mapping current processes, mapping desired processes, identifying technologies that can appropriately support the desired processes, and putting together a transition plan, that takes into account the needs (but not necessarily the wants) of all of the stakeholders and that is supported by the appropriate executive(s) in the C-Suite, that will get the organization there.

So if you want to get to 2020 in style, first get to 2014 in-style and focus on the 3Ts. This is one best-practice that is year-independent.

PPM is important, but it should be done by a COE that functions as a PTO. Not a PMO.

Confused yet? Let me explain.

Late this spring, over on Spend Matters, Pierre Mitchell, noting that PMOs have failed in IT asked “Should We Really Use Them in Procurement”. This post, which followed Jason Busch’s post that asked” Does Procurement Need a PMO?” (Spend Matters Plus Content) offered may reasons why a PMO should be pursued in Procurement. However, in SI’s view, not one justifies the focus on a PMO.

A PMO, short for Project Mmanagement Office, is a group or department within a business, agency or enterprise that defines and maintains standards for project management within the organization. (Source: Wikipedia) This department, which strives to standardize and introduce economies of repetition in the execution of projects, sounds good in theory, but has often failed in practice, especially in IT. Why? Simply put, you can’t manage what you don’t understand — and IT projects, which are exceedingly complex in nature, can only be understood by the senior engineers, software architects, and developers capable of implementing them. They’re not going to be understood by a two-bit run-of-the-mill project manager whose background is a basic business degree and training on the PMBOK (Project Management Body of Knowledge). The few IT projects that succeed are those that are managed by former engineers, software architects, and/or developers that have been trained in basic project management (and not the other way around). It’s the same reason mathematicians (given enough Ritalin*) can make great (forensic) accountants, but accountants make bad mathematicians. (Who, when they see 2x + 2 will ask “two times what”.)

Similarly, there are some Procurement projects, especially in high-tech, medical, and automotive, that are too complex for an average project manager. These should not be managed by a project manager, but by a domain expert. However, they should be tracked and the appropriate resources made available by a Center of Excellence (COE) that functions as a Project Tracking Office (PTO). This COE would insure that the domain expert has the appropriate tools, methodologies, and processes at her disposal and the training to use them, as well as the necessary training in project management. In addition, it would focus on Procurement Performance Management (PPM) and, as Pierre Mitchell noted, act as a TMO — Transformation Management Office.

In other words, SI agrees with Pierre Mitchell in that there is a need for better Project Management, and in particular, Project Performance Management, in Procurement — but disagrees in the approach. We need to focus on the COE — not the PMO. It’s important that the focus is on excellence, not the mundane.

* Let’s face it, Accounting is pretty boring to a mathematician who might need a little help focussing on it for eight hours a day.

How Do You Identify Tomorrow’s Supply Chain Paupers? (Repost)

SI posted this last September. It’s posting it again because, after speaking to a number of e-Procurement and e-Invoice providers over the summer, it seems the situation hasn’t changed much in the past year and the point of the post needs to be reiterated. Plus, as you’re just getting back to work from a summer vacation, a slightly familiar post is a nice way to ease back into a routine.

They still use paper today.

Although I don’t understand how any supply chain focussed business, and a logistics carrier in particular, could still be paper-based. It blows my mind that the WT 100, in their recent article on “Rounding the Optimization Curve”, reports that there are still a significant number of carriers that keep their records on paper. How can you survive in today’s cost-competitive, just-in-time, value-conscious supply management landscape and work on paper?

And while we’re at it, let’s talk about how you can identify the dead men walking of the day after. They use Excel. We’ve known for years that errors in spreadsheets are pandemic. Needless to say that it boggles my mind that Microsoft Excel continues to be the application of choice for supply chain and logistics management around the world. Fidelity lost 2.6 Billion as a result of a spreadsheet error, Fannie Mae made a 1.13 Billion honest mistake, and RedEnvelope lost more than a quarter of their value in a single day after they warned of a fourth-quarter loss due to a budgeting error that resulted in an overestimate of gross margins. How long is it going to be before someone accidentally uses a plus sign instead of a minus sign in a profit formula and forgets to uncap an inventory calculation and instead of ordering 100,000 units of a profitable product, instead orders 1,000,000 units of a product that actually results in significant losses at the target sale price, for which the market demand is weak, ties up all of the organization’s working capital, and essentially bankrupts the company? My guess, with the steadily increasing complexity of S&OP, JIT inventory management models, and supply chains, not much longer. But, maybe after a few companies are brought to their knees from spreadsheet errors, we’ll see the day when Excel is sh!tcanned along with the dinosaurs who still think it has any more use than a HP or TI calculator.

It’s time for anyone still on paper or Excel to wake up and realize we don’t live in Walt Disneyland and that the story of the prince and the pauper is a fairytale. A pauper is not going to become the benefactor of princely riches just by looking like a bigger, richer, company. In today’s uber-connected world, appearances don’t account for much. It’s not long before someone digs deep and uncovers the truth.

There’s a reason why customers are demanding end-to-end visibility of their supply chains, including those of their supply chains logistics’ partners. And a reason customers ow expect all of their suppliers and business partners on the supply chain (including logistics providers) to participate in a supply chain social network. It’s because they know that the only way they can accurately manage their supply chain is to keep on top of it, that the only way they can build accurate models is with accurate data gathered from partners, and that the best reports they are going to get are going to come from supply chain visibility and planning software plugged into these “social networks” (where, in reality, these are “enterprise communities” that allow the necessary collaboration, not “consumer networks” where you can poke, prod, and shake your buddy for no apparent reason).

In other words, paper is dead, and Excel will be the new paper, and then, someday, it too will be dead. So if you don’t want to be the pauper, move off of these technologies and onto solutions designed for your supply management needs. With a plethora of Best-of-Breed solutions on the market, designed for large and small providers, it’s extremely likely that there’s at least one solution that meets your needs almost exactly with minimal tweaking. If you look hard enough, the doctor would bet that there’s at least three, or will be before you can look twice.

PrimeRevenue: Priming Your Financial Supply Chain for Success, Part II

In Part I, we discussed how PrimeRevenue, a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers, including a large number of Fortune 500 and Global 3000 companies, in 40 countries and that processes Billions of dollars of transactions each year, provides a supply chain financing solution that goes beyond just providing a platform to sell receivables and includes an analytics component that helps a buying organization figure out how to best meet its working capital needs.

In particular, as part of their platform, they provide a module by the name of SCiMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence that allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands. It does this by analyzing all of your spend data, presenting you with potential opportunities for payment term extension, and providing you with a what-if analysis platform that allows you to tailor a plan to meet your needs in a manner that is consistent with your level of risk.

The potential opportunities for working capital improvement are summarized on the unique SCiMap dashboard that summarizes:

  • Commodity Standard Opportunities
    for which commodities are you paying faster than market average?
  • Vendor Standard Opportunities
    which vendors are you paying faster than your competitors?
  • Parent Standard Opportunities
    which vendors are you paying faster than the average time in which their parent or sibling organizations are paid?
  • Country Standard Opportunities
    which vendors are you paying faster than the average DPO for the country?
  • Cost Neutral Opportunities
    which vendors could be paid later with no impact to their finances? (e.g. they
    are cash rich while you are cash poor or they are financing at 90 days and you are
    paying at 60 days)
  • Discount Opportunities
    which vendors could you convert from early payment discount terms (that they are
    unable to effectively take advantage of) to standard terms?
  • Inventory Turnover Opportunities
    which terms could be extended to match inventory days and associated carrying costs?
  • Buyer Standard Opportunities
    which vendors are you paying faster than your average payment terms?
    (note that if your average payment terms are worse than market averages, these may
    not be real opportunities)

From this dashboard, that will typically identify hundreds of millions of working capital that could potentially be freed up in a typical multi-billion dollar company within a matter of weeks, a senior Supply Management analyst can dive into each pot of opportunities, identify the commodities and vendor in question, access the credit-rating and average finance rate for each vendor, and determine if the opportunity is real or not. SCiMap can even do program design to help procurement determine what suppliers will be targeted first based on different criteria to maximize the opportunity.   From here, the buyer can identify the real opportunities for working capital improvement that will not endanger the vendors or increase the overall supply chain cost to the end consumer. The Supply Management analyst can then create a term extension model that will benefit the organization without hurting the supply chain.  Then in SCiMap procurement can report what actually happened in execution to see where the model was successful or had challenges.

This is important because, despite the best efforts of your accounts receivables department, receivables collection will only take an organization so far, which means the organization will have to hang on to cash longer to improve working capital at some point. Inventory optimization will help, but if the Supply Management organization is mature, inventory will have been optimized long ago and there will be no more opportunities to improve working capital. Furthermore, during periods of prolonged recession, you know that Treasury is going to demand term extension as a way to improve the cash position of the company, and you have to be prepared for this because you know better than everyone that you can’t just increase payment terms from 60 to 90 and not negatively impact your supply chain. Not only will some suppliers be unable to bear the term extension, others will take back the benefits that you negotiated in exchange for faster payment. Preferred customer status and order fulfillment during a supply shortage? Forget it! Faster-than-guaranteed response times on service? Dream on! Marketing perks? Ha ha! And let’s not forget the fact that if you are already paying some vendors slower than market average for the commodity, vendor, or country, you might be paying more than you have to and speeding up those payment terms might decrease your overall costs – not having to pay at all improves working capital much more than paying late.

The SCiMap solution, which is unique, is a must-have for any organization that wants to truly optimize it’s working capital in a way that won’t come back to bite it in the @ss at contract renewal time, especially when you consider the fact that PrimeRevenue has analyzed trillions of dollars in spend and will only present you with opportunities for consideration that are real for at least one group of companies in the global supply chain. While all the opportunities may not be real for your organization, you won’t waste time analyzing commodities or vendors that obviously cannot handle a term extension. This gives you the ammunition to push back on Treasury or the C-Suite when they get the hair-brained idea that just because their competitor was able to increase payment terms by 30 days and get away with it that your organization can too.

Working Capital Optimization – The Basics

Working Capital Management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. (Source: Investopedia)

Working Capital Optimization is optimizing the balance between assets and liabilities, and, since assets can’t generally be acquired or disposed of on a regular, or quick basis, generally focusses on optimizing the ratio of cash-on-hand (and liquid assets that can be converted into cash-on-hand within 90 days) to liabilities. In practice, most organizations attempt to accomplish this by optimizing receivable collection, inventory cycles, and supplier payment terms. In other words, they try to collect receivables faster, reduce inventory cycles, and extend payment terms.

These are all valid ways to optimize working capital, but if they are not undertaken correctly, supply chain costs will rise. If you force your customer to pay before they can afford to and the customer has to borrow to do so, that’s going to increase their cost to service their customer, and if their customer can’t pay, they are going to come after you for price reductions at contract renewal time, and that’s not good for anyone. If you try to reduce inventory turn-over too aggressively, you will end up doing a lot of expediting or LTL shipments, which will reduce overall acquisition costs in the long run. And if you extend payment terms beyond which your suppliers can afford, at the very least you risk increasing your costs substantially as they will have to borrow at high financing rates and pass that cost onto you and you may even risk their financial solvency.

So how do you optimize each of these areas?

  • Receivables Collection
    Go after slow customers, but focus on those with the most ability to pay first. For public companies, use publicly available financials to figure out who is cash rich. For private companies, use credit rating data, such as that provided by services like D&B.
  • Inventory Cycles
    Optimize inventory (carrying) costs versus logistics costs versus potential loss from stock-outs and determine the optimal inventory cycle for each commodity.
  • Payment Terms Extension
    As per Tuesday’s post, figure out which suppliers can afford payment extensions such that they would suffer no negative impact or where the overall supply chain cost that would be borne by the end consumer is lessened and extend the terms.