Category Archives: Best Practices

Spend Analysis VI: New Horizons (Part 2)

Today I’d like to welcome back Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectifAI) who, as I indicated in part I of this series, is authoring the first part of this series on next generation spend analysis and why it is more than just basic spend visibility. Much, much more!

Federation

One of the most serious limitations of OLAP analysis is the schema structure itself — typically a “star” schema, where a voluminous “fact” or “transaction” file is surrounded by supporting files, or “dimensions.” In the case of spend analysis, dimensions are Supplier, Cost Center, Commodity, and so on; transactions are typically AP records.

Why is this schema limiting? Because there are only certain ways that a dimension file can be linked to transaction files, and it isn’t always clear which file ought to be the transaction file and which files ought to be dimensions. For example, suppose that the transaction file consists of AP transactions, and a dimension file consists of invoice line items. The problem is that the invoice line item file is “moving faster” than the AP file; i.e. for every invoice number that appears in AP, there are multiple invoice lines that match. Which invoice line item should we link to?

Well, we could invert the problem and build the dataset from the invoice detail file instead, except that we typically won’t have invoice detail for every AP record, so that probably won’t work. Here’s a couple of ideas that will work: (1) we could build a separate measure column for invoice line items, and include them as AP record equivalents (coercing the two record types into a common format); (2) we could drop the associated AP record whenever we have invoice line item data, and include the AP information inside those line items, redundantly.

There are other options, too.

But the essential problem is that we have two separate datasets, and we’re trying to join them at the hip. There is an AP dataset, and there is an invoice line item dataset, and never the twain shall meet, except artificially. Even when there is no granularity issue at all, and when one dataset can be normalized or snowflaked such that every matching line item can be joined through from the other, the amount of effort required to set up the index->index->index relationships can be daunting.

Instead, why not create two separate datasets, efficiently and quickly; and then as a final step, federate them together on a common dimension? Suppose the federation logic was “join” — in that case, we’d drill on an element in dataset A; dataset B would drill on the common dimension from A; and then A would drill again on the common dimension from B. What we’d see is the perfect join of all of the records from A and from B that shared a common key in the common dimension; and we’d have the ability to reference all data from any dimension of both A and B.

There are many forms of federation in addition to join — for example, “master-slave,” where we drill on A, and B shows us its common nodes; but does not feed those back to A. That relationship can go the other way, as well, from B to A. In addition, there’s a “disjoint” operation — show me all the nodes in B that don’t share a key in the common dimension with A (and vice versa).

Federation represents a key productivity enhancer for dataset creation, as well as a simplification to the dataset building process in general. Federation also passes the “usability” litmus test, in that the resulting datasets are much easier to understand than massive levels of index indirection and snowflaking, and have the potential to produce richer results.

The technical challenges for federation are considerable: maintaining multiple connections to multiple datasets; representing multiple data dimensions inside the context of a single data viewer; providing mechanisms for pulling data seamlessly from multiple datasets for reports and analyses; and last but not least, augmenting the OLAP engine to perform federation operations effectively and quickly.

Is federation worth it? I think so, emphatically.

This brings to an end our initial Spend Analysis series. Thanks for the opportunity, Michael; and thanks to everyone who took the time to wade through it.

As Eric said, this ends Sourcing Innovation’s initial series on spend analysis. I’d like to thank Eric for his enlightening posts and hope that you learned something from them.

Show You The Money, Part II (Supply Chain Cost Avoidance Basics)

Yesterday we talked about the fact that the best way to save money is to avoid spending it in the first place and introduced you to the 4 F’s of Cost Reduction: Failure, Facility, Focus, and Finance. Today we are going to discuss focus and finance and point out the specific solutions and methodologies you can use to meet your goals of increased cost avoidance.

Focus
This refers to your market focus and how you address the market. More specifically, it refers to your marketing and sales costs. Don’t just let marketing outsource a campaign – there’s no guarantee the agency they select are going to get anywhere near the best prices for print and media production. If you need to bring an agency to help with your message – do so – it’s often a great idea, especially if they understand your target audience. But make sure they’re service costs are decoupled from the print and media production costs you can control and often save big on. Also, if your sales people don’t have the right message, or don’t attack the right audience, they will be wasting a lot of the companies money. It may sound like it’s their problem, and not yours, but the reality is that if they do not make their sales numbers, then your company’s demand will not hit its forecasts. This means that you will not be ordering as much as you thought, and if you cut a great deal that came with a big rebate once you ordered one million units, and you only order 900,000, you don’t get your rebate, you don’t hit your savings number, and all of a sudden it looks like its your fault. So make sure you have systems in place that allow sales to collaborate with engineering, marketing, and procurement and truly understand what they have to sell, what it can do for the customer, and who they should be targeting in their efforts. Also, if they sell more than they expected, they need to be able to inform you quickly so you can adjust your orders to meet a demand surge.

Finance
They say money talks and money walks. But they often fail to tell you that it’s easily the most expensive asset you have. You have to collect it, disburse it, protected it, pay taxes on it, and, more often than not, finance it. And that last one can really cost you a lot of money – even when you are not actually financing it yourself. The fact of the matter is this: if anyone, anywhere in your supply chain has to borrow a lot of money to meet the demands placed on them, they are probably paying a large financing charge, which is being rolled up into their price, which is inflating your price. Therefore, it is vitally important that you understand your supply chain, especially your tier one suppliers, and do what you can to mitigate financing whenever you can. If paying up front will mitigate the need for your selected supplier to take out a loan that costs them 5%, then they will be able to reduce your price by 5%. Unless you have an investment that will absolutely guarantee over 5% return, and that’s unlikely given the unstable nature of investments, then simply paying early can avoid 5% of otherwise non-avoidable costs.

Disbursing your money can also cost you a lot of money, especially if you have people who aren’t buying on contract and using the absolute best price that you spent a lot of time and effort negotiating and securing. Make sure you have a good contract and compliance management system in place to allow you to track your contracted costs, track purchases against those contracts, prevent, or at least alert you to maverick spend (sometimes it might be necessary, in order to prevent a disruption), and insure that suppliers are billing you what they agreed to.

To summarize, you can also save money by avoiding spend in the first place, and you do that with the right strategies supported by the right technologies and methodologies. Therefore, in addition to the nine technologies and methodologies I outlined in Show Me the Money!, make sure you also have the following technologies and methodologies in place to help you avoid spending that cash in the first place!

And now you also understand why I (will) also (keep) talk(ing) about companies like:

  • Austin Tetra (acquired by Equifax),
    Aravo,
    Connect4Growth,
    Open Ratings (acquired by Dun & Bradstreet),
    VendorMate (acquired by GHX, acquired by Thoma Bravo)
    Vinimaya (rebranded Aquiire, acquired by Coupa),
    etc.
  • Browz (merged with Avetta),
    CT Space (acquired by idox),
    Logility,
    New Momentum (acquired by Market Track, acquired by Vista Equity Partners),
    Quadrem (acquied by Ariba),
    Sockeye Solutions (rebranded Vecco International),
    etc.
  • Salesboom.com,
    SalesForce.com,
    etc.
  • Fogbreak Software (defunct),
    i-Many (acquired by LLR Partners),
    International Trade Bureau,
    Nextance (acquired by Versata Enterprises),
    Upside Software (acquired by SciQuest, rebranded Jaggaer),
    etc.

Show You The Money, Part I (Supply Chain Cost Avoidance Basics)

Last week, in Show Me The Money! I asked you to apply various technologies, methodologies, and strategies to stop your supply chain from hemorrhaging cash and Show Me The Money! And if you did everything I asked you to do, it would be a great start, as it would provide you a big, fat, increase on your balance sheet, but it’s not the whole solution. Even though I only addressed every aspect of your physical supply chain from raw material mining through final delivery to the end customer, I only addressed the physical supply chain. Furthermore, I only talked about cost reduction technologies, strategies, and methodologies – and the fact of the matter is the best way to save money is to avoid spending it in the first place!

So today, we’re going to talk about the other half of the supply chain, and for those of you who want a very simple classification, the cost avoidance half of the supply chain. Just like there are four areas where the right technologies, methodologies, and strategies will save you a lot of money, there are four areas where the right technologies, methodologies, and strategies will help you avoid spending money in the first place. They are the 4 Business F’s of Cost Avoidance (as opposed to the 4 F’s of Product Design, as brilliantly laid out by Eric Hiller in his “The Fourth F”* post on Spend Matters).

The Four F’s

  • Failure
  • Facility
  • Focus
  • Finance

Failure
According to Aberdeen’s “Global Supply, Visibility, and Performance Benchmark Report”, the average company has had an average of two major supply chain disruptions per year and industry average and laggard companies are only able to meet customer-requested ship dates 40% of the time. Every time something goes wrong, it not only costs you revenue (lost sales, etc.), but it costs you had cash as you usually have to take expensive action to fix it. Thus, if you could prevent failure, you could prevent costly expenditures and revenue loss that, when combined, can easily break six, seven, and even eight digits.

So how do you prevent failure? You manage your suppliers and you manage your risk. How do you do this? Through visibility, enablement, and risk-mitigation strategies. Invest in a supply chain visibility system to always know where your parts are, where your parts’ components are, and where the raw material is coming from. If your supplier has a temporary shutdown, you need to know. If their supplier runs into a problem, you need to know. And if the mining company had a shortfall, you need to know. With enough lead time, you can relay an order to another preferred supplier, inform your supplier that they may need to follow up with their supplier to make sure they have the components when they need it, or lock up additional raw materials in a different part of the world – preventing a supply chain disruption long before it happens. With a supplier enablement system, you can not only help them inform you of potential problems before they happen, making sure that such problems are resolved before they occur, but you can help them improve their efficiency, which will ultimately lower your costs even more. Risk mitigation doesn’t require a system, just good planning. Make sure you have at least two suppliers for key purchases – or if they are custom made, and dual-sourcing is difficult, make sure your chosen sole-source supplier has multiple plants where the components could be produced – preventing against disruption by natural disaster or political unrest in a specific region.

Facility
Facility can be defined as readiness or ease due to skill, aptitude, or practice, in other words, facility relates to your level of productivity. Just because you can’t do much about your labor costs, as wages are more-or-less set by the market, that doesn’t mean that you can’t maximize your return. Maximizing your productivity will allow each of your resources to do more, effectively lowering your overall cost for each unit or service you offer. In addition to the strategic sourcing, spend analysis, and award optimization systems I highly recommended you provide to each of your buyers (as such systems have been proven to reduce cycle times by an average of 66% or more), I also recommend providing them with good collaboration, e-Procurement, and Procure-To-Pay systems. Collaboration systems allow remote groups to work together more effectively and e-Procurement and PtP systems greatly simplify the actual ordering and payment processes, allowing your users to spend less time on tactics and execution and more time on strategies to reduce and avoid costs.

Come back tomorrow for a discussion of focus, finance, what-to-do, and where-to-go!

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Don’t be a Victim of the Performance Gap (Procurement Best Practices)

According to the Hackett 2006 Enterprise Book of Numbers, there is a growing performance gap in sales, general and administrative operations between world class and average companies with top performers generating significant savings while delivering improved effectiveness and reduced risk. Don’t have a copy? No worries – the IACCM ran a great summary article last month.

Hackett’s research found that by achieving world-class performance in four core operational areas – information technology (IT), finance, human resources (HR), and procurement – companies can reduce annual SG&A costs by $60M per B in revenue. At the same time, these world class performers show superior effectiveness, deliver higher quality services, and benefit from increased economic returns and reduced risk.

In addition, Hackett found that world-class performers demonstrate strength in five best practice categories: strategic alignment of business goals and operating procedures, complexity reduction, technology enablement, business processing sourcing; and cross-functional partnering. Furthermore, the strategic use of technology plays a key role in achieving world-class performance.

The article also quotes Pierre Mitchell (who needs no introduction) who states that “The best companies may differ in their size, industry or regulatory environment, but what they share is their ability to use back-office functions, traditionally viewed as cost centers, to generate competitive advantage. They do this, regardless of function, by relying on specific management approaches in the five areas we’ve identified.” World class organizations support continuous improvement within individual functions, cross-functionally and in end-to-end processes. “It’s critical to recognize that each year these world-class performers do a little better, pulling further away from the pack. The growing gap has a multiplier effect that will make it more difficult for the lagging typical companies to compete over time, a process that may soon be irreversible for many of today’s leading corporations.”

The Hackett group key findings across various SG&A functions were as follows:

Strategic Alignment
World class organizations use “flatter” management structures that are more effective. Furthermore, the senior IT executive is almost 50% more likely to be on the company’s primary management team.
Complexity Reduction
World class organizations achieve tangible benefits by abolishing unnecessary complexity in business processes. World class procurement organizations reduce complexity through strategic sourcing, consolidating their purchases among 78% fewer suppliers than typical companies, and centralization. (Hackett found a typical company with 1B in annual spend can save 8M in process cost alone by increasing the percentage of contracts negotiated centrally from 20% to 80%.)
Technology Enablement
Companies with world-class IT organizations spend 7% more per end user than their peers and their use of technology results in improved performance across other SG&A areas. Appropriately applied technology streamlines and automates operations and world-class organizations spend 45% less than typical companies on finance operations.
Business Process Sourcing
World class companies leverage business process sourcing options at the process level and do not hesitate to change sourcing solutions if they fail to meet the desired results.
Cross-Functional Partnering
World class organizations seek synergies across business functions through cross-functional cooperation to achieve common goals. Procurement staff work alongside their functional peers to understand business need, plan spending and supplier selection, and take into account current and future needs.

So don’t get stuck in the procurement gap – take Hackett’s advice to heart and join the world-class organizations who are saving an additional 6% per year on their procurement efforts. Don’t know where to start? Since technology is key, start by adopting state-of-the-art on-demand strategic-sourcing solutions, such as those offered by Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric) and Procuri (acquired by Ariba, acquired by SAP).

Missing the Point … or … The Right Way to Handle Freight

Last week I summarized my comments on how Sometimes 80% is enough here on Sourcing Innovation. I did this for multiple reasons – it seems that not everyone gets the point that with regards to optimization, not only is 100% unattainable, but even striving for 100% is often ludicrous.

The reason for this is that you are never optimizing against actual data, but estimated data. Remember, when you are sourcing, you are sourcing against forecasted needs, on forecasted schedules, with forecasted shipment levels associated with forecasted freight costs. Your demand probably will vary slightly, and may vary significantly, your schedules will need to be accelerated or decelerated when demand spikes or drops, your shipment sizes will also vary with seasonal demand variations, and with freight surcharges the norm these days, your freight rates will never be locked in stone. Thus, even an “optimal” solution is not optimal.

Moreover, striving for an optimal solution instead of settling for a (very) near optimal solution may actually decrease the quality of your solution. For example, let’s say your supplier gives you a significant discount (in the form of a rebate) of 10% if you buy 60,000 units, and your anticipated demand is precisely 60,000 units. Let’s say you award the supplier the business, but your forecast was over by 5% and you only buy 57,000 units. Let’s also say that the second cheapest supplier was only 3% less expensive. In this situation, your search for the ultimate solution cost you 7%!

As another example, let’s say a certain carrier will beat every other carrier’s truckload rate by 10%, where the truckload rate applies if you fill 75% or more of the truck. Let’s also say that we have the situation where your expected shipment is 80% of a truckload, that 25% of a truckload costs 20% more than the average shipping cost across your other carriers, and that your shipment size varies significantly by season and promotion (because you are in the food service industry, for example). One week you’ll ship 80%, the next week you’ll ship 60%, and the week after you’ll ship 120%. Chances are good that, in reality, you will not be shipping truckload half the time and paying on average 10% more. (If you are paying 20% more half the time, you’re paying 10% more over all.)

So this brings me back to the title of my post – the right way to handle freight. First of all, let’s note that when dealing with freight, you have one of five situations:

  • Freight is a small percentage of total spend, less than 20%
  • Freight is a moderate percentage of total spend, 20% to 40%
  • Freight is more or less equal to total spend, 40% to 60%
  • Freight is a large percentage of total spend, 60% to 80%
  • Freight is a majority percentage of total spend, greater than 80%

The first case is the most important case. Why? Because it is this case that I find to be the most mishandled and misunderstood. I know for a fact that many corporations have thrown away millions, if not tens or hundreds of millions, of dollars because of their belief that freight optimization needs to be perfect even when it falls into this case and have put off acquiring a decision optimization solution in hopes that the perfect solution will come along soon.

This is the case where the “sometimes 80% is enough” rule comes into play. If someone provides you with an optimization solution that can handle your buy almost perfectly but only handle freight 80%, don’t dismiss it as imperfect and pass up an opportunity to save millions just because it’s not perfect in your eyes. Do the math! If freight is at most 20% of your spend, and the solution is expected to be at least 80% accurate, then the solution computed by the optimizer will be at least 96%. If freight is at most 10% of your spend, then the solution computed by the optimizer will be at least 98% optimal. If your non-optimization assisted solution doesn’t even approach 90% of optimal, why would you pass up an opportunity to save an extra 6%-9%? After all, as per my arguments above, I’d argue you are never going to achieve more than 98% (on average) in reality anyway! So don’t look for perfection when evaluating optimization solutions – chances are you will not find it (even though some solutions might come quite close) as it’s still a maturing and improving technology.

What about the other cases? The fifth case, where freight is the majority of your spend is also easy – you simply invert the problem and source freight lanes, and treat the product buy as freight.

The middle cases are harder. As for cases two and four, where freight is a moderate or large percentage of spend, the best way to handle these cases is to combine the categories with similar categories that can, or will in all likelihood, be shipped on the same trucks or in the same lanes. Preferably, those categories where, in the second case, freight is significantly lower and bumps you back into the first case or where, in the fourth case, freight is significantly higher and bumps you up into the fifth case, as we already know how to handle these cases. Case three is the toughie – product cost and freight are almost equal. What do you focus on?

This is the case where you do enterprise-wide freight optimization. You optimize all of the product buys, amalgamate all the freight requirements, and then optimize the freight. Unless, of course, your spend is significant enough, your pocketbook deep enough, and your patience long enough to throw CombineNet’s top-end optimization platform at it. (It really depends on your organization size – if you are a large organization, the cost of CombineNet should be inconsequential, especially considering the potential savings. If you are a small organization, the difference between the cost of the solution and the expected savings is not likely to be significant. If you are a mid-size, it depends on category size and characteristics.) On an ultra-high end server, their platform can certainly handle most of the problems you can throw at it, but not all problems solve in less than a second … a large and complex enough problem will take minutes, hours, or even days regardless of how good your optimization platform is. (However, if it takes more than a few hours, chances are your model is not the right one.)  Also, since their solution is not part of any suite where your data resides, there will be some integration time.  (But that’s a small price to pay to save $$$!)