Category Archives: Best Practices

Sometimes Old-School Works Just Fine: An EC Sourcing RFP Case Study

It’s still a buyer’s market. Many suppliers are desperate for business, supply (capability) still exceeds demand in many markets, and even though prices are starting to rise in some markets with expectation of recovery, they haven’t risen much yet. According to many strategic sourcing professionals, it’s the perfect market for an (e-)Auction because suppliers will compete for your business. And while that may true, it does not guarantee that you’ll get the best result.

An e-Auction carries a number of risks. The result can be higher prices than a traditional negotiation. For example, if the auction was limited to a small number of suppliers, who are in contact, they may collude to keep prices high — or they may all adopt a strategy of delayed bids and minimum bid decrements which could result in higher prices. The result could be unsustainably low prices. A supplier, desperate to win business, might hope to make up losses in future volume, bid a razor thin margin, and then risk bankruptcy when its costs rise. At this point, the only choice for the organization would be to accept higher prices (through surcharges) or risk an interruption while a search for a new supplier was conducted. And the result could be strained supply base relations. A poorly conducted event can instill animosity in winners and losers alike, which would result in poor service from the winners and lack of response in future bid requests from the losers.

As a result, sometimes the best approach is an old-fashioned multi-round RFX with feedback between each bid, as it was for a certain mid-size apparel retailer, who we’ll call Apparel-For-You, who was new to e-Sourcing and just wanted a way to streamline their ocean freight bidding efforts (for their 25M ocean freight category) and communicate with suppliers in a consultive way. Specifically, Apparel-For-You, not realizing the significant savings opportunity before them, had the following goals in their search for an e-Sourcing solution:

  1. Understand Supplier Willingness to Bid on a Per Lane BasisHistorically, Apparel-For-You had been surprised a number of times not only with respect to bids that came in, but with respect to lanes carriers were willing to bid on individually
  2. Reduce Analysis and Reporting TimeApparel-For-You’s supply base, which provided them with over 2,200 individual SKUs, was spread across 30 ports of origin, 4 major ports of destination, 9 carriers, and 4 container types — which equals 4,320 bids to be collected and analyzed before the 120 lanes can be divided among the carriers. While certainly not impossible to do by hand, that’s still 10 (9 carrier plus 1 integrated) fairly large spreadsheets to manipulate and analyze in a time consuming and error-prone manner.
  3. Communicate with Suppliers in a Consultative and Regular FashionWithout a dedicated sourcing tool, it’s difficult for all team members to know when a carrier was last contacted and what was discussed. The ball could be dropped, and this could lead to a damaged relationship. Given the importance of relationships in Apparel-For-You’s supply chain, as apparel has a short product life-cycle, this is something Apparel-For-You wanted to avoid.

Given these requirements, and Apparel-For-You’s lack of e-Sourcing sophistication, EC Sourcing recommended that Apparel-For-You use a multi-round RFX, starting with an RFI to find out which carrier was interested in which lanes, with analysis and feedback between each round. The carriers were all informed up-front of the new process, and Apparel-For-You consistently followed-through after each round.

Using the built-in templates, Apparel-For-You was able to easily create an RFI that allowed it to create the right pricing matrix for each supplier as well as clarify important T&C’s with each. The process of collecting bids from carriers, who were used to Excel, was simplified by way of Excel integration. This integration also simplified the amalgamation of the bids into a single matrix for analysis purposes, as the integration was automated and free from human error.

Using built-in reports and advanced analysis models provided by EC Sourcing, Apparel-For-You was able to quickly analyze the bids after each round and provide the supplier with feedback on their relative ranking, which included how much they’d have to lower their bids to improve their rank and take the #1 spot. Using this information, the carriers were able to adjust their bids accordingly and focus on the lanes they could perform the best on with respect to the buyer’s needs.

In the end, Apparel-For-You not only accomplished their goals of

  1. Understanding Supplier Willingness to Bid on a Per Lane Basisas this information was known before the first bid was collected
  2. Reducing Analysis and Reporting Timeas the project time-frame was reduced by 35%
  3. Communicating with Suppliers in a Consultative and Regular Fashionas they were able to inform the carriers of their rank and potential awards promptly after each bid, and track when the last discussion took place

but Apparel-For-You also reduced their costs by 19%.

This just goes to show that, sometimes, old school works just fine. The full case study is available in PDF form.

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You Can Get More By Getting Mad … If You Don’t Let It Cloud Your Judgment

A recent research summary over on Strategy + Business, which summarized a recent study at UC Berkeley, noted that you can get more by getting mad, as it lets the other party know that the deal could fall through. If the other party wants the deal, this could cause the other party to rethink the terms of the offer and come back with a better deal for you that pays more attention to your demands. However, it can also backfire because if the other party doesn’t want the deal that bad, or if the other party thinks you’re only being angry as a ploy to get a better deal (when you aren’t really angry), it could cause the other party to walk away.

In other words, it’s a tool in your toolkit, but not the centre-point of a strategy that should rely on fact-based total cost negotiations. Who cares if you save an extra 5% on unit price if the logistics costs will cripple you in the end as global freight prices rise again?

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Use Johnson’s Business Model Tips to Get Your New System Approved

A few months ago on the HBR Blogs, Mark W. Johnson published a short piece on “A New Framework for Business Models” where he reviewed Drucker‘s definition for a business model which is nothing else than a representation of how an organization makes (or intends to make) money and noted that, in addition to specifying how a company (intends) to make money, it should also specify why a customer would want to buy from you.

Why a customer would want to buy from you is answered by your customer value proposition which identifies something that your customer needs and proposes an offering that meets that need. Specifying how you’ll make money is a bit harder. To answer this, you need to analyze your:

  • Revenue Modelquantity times price
  • Cost Structuredirect costs, indirect costs, and overhead
  • Margin Modelwhat is the actual profit
  • Resource Velocityhow much throughput can you achieve

When I read this, I couldn’t help but notice how appropriate the definition is to business cases in general and how you also have to clearly answer these four questions if you expect to get funding for that new supply chain system you need. For example, if you want a new e-Sourcing system, you need to define:

  • Payback (Revenue) Modelexpected number of sourcing events times expected savings per event (on average)
  • Cost Structuresoftware, hardware, support, etc.
  • Margin Modelwhat are the real savings when the costs are taken into account
  • Resource Velocityhow many more events will you be able to handle with the new system

Otherwise, you won’t have a solid business case that clearly outlines the ROI and why you should be allowed to buy it in the first place. Furthermore, if you can’t define the resource velocity, you can’t specify how it increased your customer value proposition, which, in the case of an e-Sourcing system, is increased event throughput to help other organizational units drive savings straight to the bottom line (as e-Sourcing can also reduce HR, Marketing, and Legal costs, for example).

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Three Rules of Productivity to get the Most Out of Your Day

Just about all of us are overworked these days. There are two primary reasons for that. One, due to the recession and the jobless recovery*, we’re all being asked to do more than before. Two, we’re constantly having our time wasted by Maury the Management Moron and his imbecillic twins. The latter case can be rectified by following three simple rules of productivity, which will negate most of their efforts to waste your time and suck the soul out of you.

Rule #1: If you are invited to a meeting, and in the first five minutes it is wholly unclear why you are there, leave. Indicate that you’ll be back in 30 seconds if summoned.

If the organizer can’t be bothered to organize a successful meeting, why should you bother to be there?

Rule #2: If you are copied on an email that you do not need to be copied on, ask the email originator to re-send the email without you copied on it. (Or at the very least, to exclude you on all future messages on the topic.)

Enough spam gets through our spam filters and clutters our inbox as it is, which is already full of e-mail we have to deal with. No point adding to the mess.

Rule #3: If you are a manager, and you wake up one morning and realize that the only contribution you are making to the company is accepting statuses from lower level people and providing that same status to upper level people, quit.

Let’s face it. Your job’s not worth doing. Go find one that is — otherwise, all you are doing is contributing to the time crunch and soul suck.

* Which is one of my least favorite bullcrap phrases, because there is no recovery until jobs return.

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For Efficiency, Find a Software Vendor That Uses the Three Minute Rule

A recent post over on the HBR blogs documented Cue Ball‘s “three minute rule” that they encourage their portfolio companies to adopt. According to Cue Ball, the best way to not only develop a customer-driven approach, but to truly develop customer understanding, is to use the three-minute rule where you ask your customers what they are doing three minutes before they use their tool and three minutes after.

The example they give is that, at Thomson, one of the products provides investment analysis of financial earnings data. What Thomson hadn’t fully appreciated — until they applied the three minute rule — was that immediately after accessing the data, a large number of analysts were painstakingly importing it into Excel and reformatting it. This led Thomson to prioritize developing a more seamless Excel plug-in with enhanced formatting capability. The result, an almost immediate and very significant uplift in sales.

If your software vendor uses the three minute rule, then they understand how you use each of their various modules and the integration will allow you to flow from one to the other without having to manually cut and paste data, wait thirty to ninety seconds for new modules to load, or load up Microsoft Office to complete a basic task. Furthermore, they’ll understand what applications you’re using before and what applications you’ll be using after and include easy import and export features that make importing data from the predecessor application a single click and make exporting data to the next application a single click. If switching modules is a pain, or importing and exporting is a nightmare, your vendor does not follow the three minute rule and it might be time to reevaluate your platform choices.

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