Category Archives: Best Practices

Anvil Analytical Update: 100% Free Commodity Market Data Service

Last month we told you that if you need to bring the hammer down, [you should] make sure you have an anvil to bring it down on and introduced you to Anvil Analytical, a stand-alone spend analysis technology solution that also includes a Scope-3 Carbon Tracking, a country-based Risk Intelligence, a Market & Inflation Intelligence, and a Project Management (Savings Tracking) module that you can augment the solution with. Spun out of 4C Associates, it’s a good service-oriented augmented spend analytics solution for those companies that need a hybrid service/DiY solution due to lack of manpower or lack of training/skills in spend analysis.

Long time readers will know it’s rare for SI to cover any vendor two months in a row, but a few weeks after the doctor reviewed the solution, Anvil Analytical released a new, completely free, commodity market data offering that will be a huge help to Procurement Pros everywhere. Anytime a vendor offers you real help or insight for free, and not just marketing noise, it’s worth covering.

As part of Anvil Analytical’s new free commodity market data offering, users get access to

  • commodity price charts including:
  • a historic overview of commodity price trends from numerous global data feeds
  • a written overview of the price development story

As of now, the offering includes approximately 90 commodities across

  • energy commodities (coal, crude oil, natural gas),
  • non-energy commodities (raw materials, agriculture, fertilizers, non-precious metals and minerals), and
  • precious metals

With up to twenty four years of data at their disposal (with the monthly data starting in January, 2000), it can be quite informative. It can really be a huge help you in combatting price increases as you know exactly how much a commodity increased. (However, if you don’t know the approximate cost breakdown, it will still be hard to keep the vendor’s prices as low as possible. If you think a material cost is 50%, but it’s only 30%, you’ll still accept a cost increase 60% more than it needs to be, and that ain’t great. So make sure you have a solution that gives you that level of insight if you really want to control costs to the maximum extent possible.)

If you haven’t checked it out yet, and don’t have any commodity data access, the doctor recommends you try Anvil Analytical’s free commodity market data offering. It doesn’t cost you anything, and it will help you evaluate both the extent to which you need commodity and category market intelligence as well as whether or not the Anvil Analytical solution is for you before you actually pay for a solution. Anything that gives you confidence in money you’re about to spend, or not spend, is a good thing.

There is a Price of Relocating to “Friendly Countries”, but There Are also Corresponding Cost Reductions

A recent article in El Pais on the price of relocating factories to ‘friendly countries’ noted that according to the European Central Bank (ECB), 42% of the large companies in the Old Continent that it has recently surveyed have resolved to produce in allied countries as a means of reducing risks. However, this relocation carries economic consequences, and international institutions — such as the IMF and the ECB — warn of its impact on growth and soaring prices.

The article is right. Some prices will go up as countries move out of countries in, or likely to engage in conflict, both of the physical (war) and the economic (closed borders, significant tariff increases, rolling lockdowns, etc.) variety, and move to more “friendly” countries. (As far as SI is concerned, it shouldn’t just be “friendly” countries, it should be “friendly countries close to home”. At least companies are realizing that China and/or the lowest cost country is not always the answer when that answer comes with risks that, when they materialize, could lead to skyrocketing costs and losses that dwarf five years of “savings”.

Furthermore, even though 60% of those contacted said that changes in the location of production and/or cross-border sourcing of supplies had push up their average prices over the past five years, this hasn’t been true across the board, it doesn’t have to be true, and some of those could still see savings as they optimize their new processes, methodologies, and supply chain network. (Changes don’t reach full efficiency overnight, and sometimes it is two or three years before you can optimize a supply chain network due to existing contracts, infrastructure, etc.)

Why are costs (initially) going up for many companies?

  • wages: many of the “friendly” countries are more economically mature, or advantaged, with a higher standard of living buffered up by higher wages / better social systems
  • utility charges: in “friendly” countries that are using newer, cleaner, sources of energy or limiting energy production from burning (coal, oil, natural gas) have energy costs that are often higher as the initial infrastructure investment has not been amortized, water costs could be higher if more processing inbound or outbound is required, and so on
  • production overhead: chances are that the factories are newer, required a large investment that isn’t anywhere close to being paid off yet by the owner, and you’re paying a portion of the large interest payment to the investors/banks as part of the overhead

However, it’s important to note that:

  • productivity: will go up when you move to a locale where the workforce is more educated and skilled and is better able to employ automation and modern practices, and thus gets more efficient over time, countering the initial wage increase
  • energy costs: will reduce over time as a solar farm or wind farm can produce renewable energy for decades, with the initial investment often being paid back within one third to one quarter of that time; as a result, energy prices should remain flat(ter) over time than in the locales where they are still burning dwindling fossil fuels (which rise every year in cost) and have not yet invested in renewables
  • overhead: will decrease once the investments are paid back (and the interest payments are gone), which means it can stay flat as other production related costs rise (compared to older plants which will eventually reach a point where the revitalization investment becomes significant on a regular basis)

In addition to:

  • logistics costs: will reduce when you choose a friendly country closer to your target markets (since most freight is ocean freight on fossil fuel burning cargo ships)
  • disruption costs: will reduce as less risk translates into less (costly) disruptions over time

So while costs may go up a bit at first, at least relatively speaking, they will go down over time, especially as network and process optimizations are introduced and obtained from experience with the new network, suppliers, and technologies.

Sourcing Success in these Turbulent Times Require Long Term Planning and Cost Concessions

In a McKinsey article a few months back on How medium-size enterprises can better manage sources, McKinsey said that small and medium-size enterprises often struggle to find Procurement cost savings. Yet there are ways to do it while still pursing growth and providing a superior customer experience. The article, which concluded with an action plan for procurement cost savings, recommended:

  • establishing CoE teams
  • improving forecasting
  • expanding (the) use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporating supplier-driven product improvements

which, of course, are all great suggestions, and mostly address four of the five reasons that McKinsey give that prevent companies from reining in spending, which included

  • a lack of spending transparency (which would have to be corrected to improve forecasting)
  • talent gaps (which can be minimized with the right tools, market intelligence, and CoE teams)
  • underused digital tools and automation (which is directly addressed by using more of them)
  • exclusion of procurement and supply chain in business decision (which would hopefully be a byproduct of a corporate culture for continuous cost improvement that only happens when procurement and supply chain is not involved higher up)

but the fifth is largely unaddressed — the myopic focus on the short term which McKinsey claims could be addressed by putting more effort into planning and forecasting. But that doesn’t solve the problem.

Better forecasting will allow for longer contracts to be signed for higher volumes, which can lead to long term strategic supplier relationships, and better planning can allow this to happen, but this does not completely address the need for long term planning.

Supply Chains today are not the supply chains of the last ten to twenty years.

  • rare earths are even rarer
  • many critical raw materials are in increasingly limited or short supply
  • transportation can be unpredictable in availability and cost; even though most of the world declared COVID over in mid-2022, China still had mandatory lockdowns, ocean carriers scrapped many of their ships for insurance (and in some cases, post-panamax ships that had never made a single voyage), airlines furloughed too many pilots who found other jobs or just flat out retired, and the long-haul trucking in North America (the UK, and many first-world countries) has been on a steady decline for over a deacde
  • ESG/GHG/Carbon Requirements are escalating around the globe and you need to be in compliance (both in terms of reporting 1/2/3 and ensuring you don’t exceed any caps)
  • human/labour rights are escalating and you have to be able to trace compliance down to the source in some jurisdictions; you need suppliers who insist on the same visibility that you do
  • diversity is important not just to meet arbitrary requirements for government programs or arbitrary internal goals, but to ensure you have the right insight and expertise to solve all types of problems that might arise

And you can’t effectively address any of these problems unless you think long term AND accept that some of the solutions will cost more up front.

  • In mid November, the trading price for Neodymium (a rare-earth that is critical for the creation of strong permanent magnets, which makes it possible to miniaturize many electronic devices, including the [smart]phone you might be reading this on) was over $87,000 USD/mt. In comparison, hot roll steel was around $850 USD/mt. In other words, Neodymium was 100 times more expensive than steel. And while you can still buy steel for about the same price you could 10 years ago (it was around $900 USD/mt), Neodynmium is almost $20,000 more (as it was around $69,000 USD/mt in November 2013). It’s not the only rare earth to increase about 26% in 10 years, with further increases on the horizon. You need to have a strategy to minimize your need (which could include product redesigns that use more sustainable alternatives or recycling strategies that use recovered materials from older phone models). And when it comes to recycled materials, due to a historical lack of recycling efforts, or research into technologies to make recycling efficient and cost effective, recycled materials are almost always more expensive at first. Always. But as adoption increases, plants, technologies, and processes get more efficient, and the cost goes down (while, at the same time, raw material prices for materials in limited supply continue to go up). In other words, if you want to mitigate the ever-increasing costs for rare earths and other materials that are in limited supply, you have to incorporate the use of recycled materials, and maybe even invest in your own plants (and recycle your own phones you buy back because it’s cheaper just to buy them back and extract the rare earths yourself than buy the recycled rare earths from someone else).
  • Global trade is costly and unpredictable. Supply assurance is finally dictating near-sourcing and home-sourcing (which SI has been advocating for almost fifteen years, as inevitable disaster was the logical conclusion of outsourcing everything to China as eventually a pandemic, global spat, natural disaster, or other event would send shockwaves through the world when it severely disrupted the trade routes [because even though the chances of a pandemic, natural disaster on the scale of Krakatoa or the Valdivia earthquake, or another catastrophic event is minimal in any given year, over the course of a century, it becomes very likely]), and that is going to require re-investing in those Mexican factories (that worked just fine, by the way) you shut down twenty years ago, training appropriately skilled workers in low cost North American (or Eastern Europe) locales, and paying a bit more per unit (and even transportation until the carriers rebuild those routes). But in the long term, as global transportation costs continue to rise, and the local-ish resources get much more efficient (using the best technology we have to offer), your costs, and transportation risks, will go down while your competitor costs continue to go up.
  • if you don’t insist, and ensure, up front that your suppliers can report the data you need, how will you get it; chances are those suppliers need help and modern systems, which temporarily increase their operational costs as they install, integrate, and learn the systems; not more than a few cents here and there per unit, but a noticeable blip on the overall costs none-the-less
  • if you want suppliers that monitor their supply chain and insist on no slave/forced/child labour, appropriately treated and well paid labour, and, better yet, a community focus throughout the supply chain (so that the humans who mine the materials, harvest the food stuffs, weave the silk, or otherwise do the foundational work have a reasonable quality of life, health, and safety), you’re going to have to put the effort in to find them and the extra money to support them in their humanitarian efforts; since most of these workers in remote low-cost locales are paid pennies on your dollar, it’s another blip on the total cost to ensure they are paid every penny they deserve, but it’s still a blip; but you can’t afford not to do it if your jurisdiction has laws making you responsible for slave labour that later gets discovered in your supply chain
  • and while diversity shouldn’t cost more, since it’s the same number of employees, the reality is that the supply base embracing it could be a minority, and if these minority suppliers suddenly become in demand, market dynamics may kick in and they may charge a premium that your competitor will pay; but, as new challenges continue to arise, you will need the diversity to solve them; so, another blip in the cost you need to absorb

In other words, you need the long term focus to guarantee success, and you need to understand that, up front, it may cost a bit more. However, done right, your costs will decrease over time while your competitors’ costs skyrocket. So if you truly want success, in any high dollar, strategic, or emerging category, plan for the long term. And you will truly succeed.

Good Questions to Ask If Procuring Tools With AI, Especially If You’ve Answered the First Question Wrong!

Continuing on with our statement that sometimes you have to listen to a lawyer, a recent article over on Bloomberg Law noted that Companies Should Ask These Risk Questions When Procuring AI Tools and gave us four questions in particular that were good:

Do I Understand the Data

The article gets it right when it says that AI tools are only as robust as the data they’re trained on, as well as the need to know what data is collected, how, and if all rights are respected when doing so. But what they didn’t get is that the data determines what models and techniques can be used, and what models won’t be that effective or reliable. A vendor sales rep will tell you that whatever technique it’s using is just right for your problem, but the reality is that the sales rep likely doesn’t have anywhere close to the mathematical knowledge to know if its appropriate or not, especially since that sales person may have barely passed remedial junior math (as not all US states require remedial senior math to graduate High School). Furthermore, there’s no guarantee that even the tech teams know if the model is appropriate or not. If the company just hired a bunch of developers with maybe a year of university math, gave them access to a bunch of libraries, and all they did was test out various machine learning models until one appeared to work to a sufficient degree of accuracy on the test suites they compiled, it doesn’t mean they understand the model, why it worked, or even the appropriate characteristics of the data set that allowed the model to work — it just means that they can say for data sets that look like this, it should work. (But what is look like?) You need to understand the data, and find someone who understands the models that it is appropriate for.

Have I considered Regulatory Scrutiny?

Not only do you have to take note that The Department of Justice, Federal Trade Commission, and other regulators are focused on whether technology companies and their tools create anti-competitive environments or put consumers at a disadvantage, but many jurisdictions are considering or implementing laws against the use of black-box technology where the output — which determines whether or not a person can get a loan, be insured, or even apply for a job or government program — and the logic behind the decisions, and the rules that were applied, cannot be explained. You could also be in trouble if the process is fully automated and there isn’t a human in the loop to validate the decision, if the systems uses (third party) data that it has no right to use, or if the output data is not sufficiently protected if it was generated from input data that must be protected and the output can be reverse engineered.

Have I Mitigated Security Risks?

It’s not just traditional cyber attacks on the system, it’s well calculated queries that can slightly perturb the system over time until the outputs after the 10th, 100th, or 1000th slight, imperceptable, perturbation result in an output the system never should have given in the first place, such as approving a ten million dollar loan to a high-risk foreigner who will take the money and run or denying insurance to all people with a genetic defect likely to result in a specific condition down the road that can only be treated by a single drug owned by a single pharmaceutical who will drive people into bankruptcy for a pill that costs $5 to make.

Did I include Best Practices in the Contract?

More specifically, did you include the best practices you want followed in the contract? Don’t leave best practices up to the vendor to define however they want to define them. Make sure you cover all necessary security measures, compliance with all government and regulatory guidelines on AI in the regions you intend to use it (and open standards if there are none, guidelines from the UN, the Responsible AI Institute, or something similar), and so on.

And these are great questions, but the first question you should always ask is:

Do I Really Need AI?

And only when you choose the wrong answer, and say yes, do you need to ask the questions above. The reality is that you don’t ever need AI. AI means that you, or the vendor, were just unwilling to take the time to understand the problem and design an appropriate solution. Remember that when you try to jump on the AI bandwagon heading off the cliff (for the sixth decade in a row).

Half of Procurement Leaders Expect Their Budgets to Increase. Are They the Kings of Wishful Thinking?

A recent article over on the Supply Chain Quarterly (which launched about the same time as an article on the Supply Chain Management Review) quoted the newly released 2024 State of Procurement Data Report from Amazon Business (whose PR team was working overtime) that was revealed at Amazon Business Reshape. The report, which surveyed 3,000 buyers, procurement decision makers, and organizational leaders, had a number of interesting statistics.

The ones quoted by Amazon Business on their site included:

  • 95% of decision-makers acknowledge that there’s room for procurement optimization
    (which says to the doctor that 5% of decision makers are clueless and need to be replaced)
  • 85% of respondents say the difficulty of sourcing suppliers that follow sustainable practices prevents their company from setting or achieving strategic sustainability goals for procurement
    (which is totally logical because when there is a national demand for something that is in extremely limited supply, most companies will fail; it’s like demanding gender equality in STEM organizations in North America; on average, women are 25% of STEM workers; this means that for every STEM organization where they manage to fill more than 25% of their positions with women, there is an organization of equal size that won’t)
  • 81% of respondents had mandates to buy from certified sellers, which might include sustainable, local, or disadvantaged group-owned businesses
    (and it would be nice to know what percentage achieved those mandates; the doctor would be surprised if more than 25%, at most, succeeded)

The SCQ and SCMR picked up on different statistics, and you can read the articles to find out, but the most interesting to the doctor is:

  • 53% of business respondents in the survey expect their budgets to increase in 2024.

Go West, Young Man, Go West and pan for the gold! As far as the doctor is concerned, you’re the King(s) of Wishful Thinking. And, if you really want to, you can call me a bitch like it’s a bad thing for suggesting you’re so far out of this world that you’re a space oddity, but it doesn’t change the fact that you need to sit back, have a deep think, and accept the reality that it’s not going to.

Before you find new offensive adjectives to describe the doctor, ask yourself: When was the last time you received a significant budget increase that was above inflation? And when did it include even a dollar more than what was needed for the new hire(s) you fought nine months for or the system that your CFO decided he or she liked best? And if so, was it enough to actually acquire a new system or an extra hire you didn’t have to fight nine months for? In other words, when was the last time an increase you received was truly significant?

Procurement needs to remember that, in most organizations, it is still looked at as a cost center even though it may be the only profit center a company has left in an inflationary economy with declining consumer demand. As a result, with budget scraps are few and far between, those budget scraps are going to continue to go to sales and marketing hoping that the closers and the mad men will save them, and we all know that’s not going to change anytime soon in most companies.

Expectation is not always reality. And wishful thinking is just that. To succeed, don’t plan for any increases beyond specific increases for specific headcount or CFO friendly systems you have already hard fought and negotiated. This way, you won’t feel let down and you’ll be setup for success.

And while my gloomy glass more-than-half-empty outlook on the situation may not be very gladdening, remember that you are Procurement Pros, you always have sour lemons (and nothing else), and when challenged, you still find ways to make the best lemonade. Prepare for tough times and, on the off chance they are a little less tough, you are guaranteed to succeed.