Category Archives: Blogologue

Reverse Auctions: Old Is New, But One-Time is Still Just One-Time!

The IBM Center for The Business of Government’s recent report by David C. Wyld (the Director of the Strategic e-Commerce/e-Government Initiative at Southeastern Louisiana University) on Reverse Auctioning: Saving Money and Increasing Transparency is a great read for government organizations and a good read for Supply Management organizations that are on the back-end of the supply management innovation curve, as long as these organizations don’t fall for some of the claims that are hyped beyond reality (with respect to the private sector). While a private sector organization will generally see all of the following benefits the first time they use reverse auctions:

  • downward prices
  • increased competition
  • real-time market pricing
  • process efficiencies
  • time savings
  • increased number of suppliers
  • sustainable cost savings

These are the benefits a private-sector organization will generally see the second time it runs a reverse auction:

  • real-time market pricing

That’s right. The only additional benefit an average private-sector organization will see continue to see the second time it runs a reverse auction on a category is real-time market pricing. Why? Let’s take the suggested benefits one-by-one.

  • downward prices
    Generally speaking, the first time suppliers are invited to take part in a transparent winner-takes-the-contract auction in a market that favours the buyer, the suppliers will compete so aggressively that they will even jeopardize profit margins. As a result, the prices they offer will generally be unsustainable in the long term. That is why auctions started to fall out of favour with market leaders in the mid-noughts. While the first auctions returned amazing results, the subsequent increase in raw material costs as demand rose resulted in their initial bids being unsustainable. Thus, the suppliers had to raise prices just to stay in business (and as soon as the power shifted back to them, the suppliers increased their prices substantially to make up for the loss).
  • increased competition
    Generally speaking, suppliers get so competitive the first time with their pricing that there is little, if any room, left to increase competitiveness the second time around.
  • process efficiencies
    Once you have shifted to the reverse auction model, you have already gained the process efficiencies you’re going to gain. Reverse auctions don’t get more efficient over time.
  • time savings
    Since reverse auctions don’t really get more efficient over time, once you have switched to the model, there are no more time savings to be gained.
  • Increased number of suppliers
    While electronic reverse auctions do allow more suppliers to be invited to the table without too much extra work, if the auction is opened up, all suppliers that want your business are going to jump in. And, when they fail to win your business, some of them will even back out the next time around.
  • Sustainable Cost Savings
    Simply ensuring that the organization gets real-time market pricing does not lead to savings. In fact, if raw material prices or demand is going up, it can lead to significant losses. The way to sustained savings in the private sector is through negotiating long term cost-reductions, process-improvements, and innovation commitments that will find additional ways to drive down costs once the fat is taken out of the supplier margin. This often requires a decision optimization, PLM, or SPM solution to find these new savings opportunities.

In short, properly used, auctions can be good for the private sector, but the greatness will only bee seen in the public sector where, on the other hand, organizations will generally continue to see the significant benefits each time a reverse auction is run on a category. Our next post will address why.

Should You Be The Best?

This sounds like a silly question as it sounds like a question where the answer should always be a resounding yes, but a recent Harvard Business Review blog that said you should stop competing to be the best, which made some good points, makes you think about it.

The blog, which quotes the current thought leadership of Michael Porter, known for his five force analysis, says that “may the best X win” is absolutely the wrong way to think about competition, because it’s practically a guarantee of mediocre performance. Why? First of all, in the vast majority of businesses, there is simply no such thing as “the best”, so this would make the competition-to-be-the-best mindset completely wrong.

This is because many consumers in a market segment have different needs and wants. Some just want functionality. Others want style. Some want goods with average durability. Others want goods that can can take extreme abuse. Some want basic designs. Others want luxury. How can you define best when there are so many market needs?

Business, despite the claims of those who promote Sun Tzu’s Art of War as the ultimate business strategy rulebook, is not war and, in many markets, there can be more than one winner that can thrive. Consider retail. As the blog points out, both WalMart and Target co-exist and thrive and win in their market segment by offering different types of value to their customers.

And when rivals all pursue the “one best way” to compete, they find themselves on a collision course, trapped in a destructive, zero-sum competition that no one can win. Eventually all products and practices become almost indistinguishable, leading to pure price wars, which leads to a deterioration of profitability. This isn’t good for anyone.

The real way to win, according to Porter, is to compete to be unique. Innovate and deliver superior value to your chosen customer segment, not market segment. Make price only one factor in a multi-factor consideration. In doing so, generate positive sum competition and grow the industry — and, in the mean time, earn sustainable returns from the value generated.

How Do You Embed Sustainability in Organizational Culture?

A recent article over on the ISM site in their eSide Supply Management publication on Embedding Sustainability: A 5-Step Approach, discussed a report by Simon Fraser University and the Network for Business Sustainability that recommended five tried-and-true strategies for making sustainability part of an organizational culture, where sustainability was defined as operating in ways that meet the needs of the present without compromising the ability of future generations to meet their own needs.

In brief, the five informal practices that were recommended were:

  1. Engage
  2. Signal
  3. Communicate
  4. Manage Talent
  5. Reinforce

For each of these practices, they recommended that actions, which included:

Engage

  • Foster Competition
    between teams and business units
  • Make It Easy
    for employees to make choices that favour sustainability
  • Support Grassroots Efforts
    that come from the workforce
  • Capture Quick Wins
    and use them to overcome resistance
  • Prioritize Recognition
    and reward employees who foster commitment and get results

Signal

  • Be a Role Model
    and walk the walk (don’t just talk the talk)
  • Support
    your subordinates when they make decisions to prioritize sustainability
  • Allocate Resources
    to back up your sustainability commitment

Communicate

  • Tell a Story
    that promotes sustainability behaviours through examples
  • Customize
    the message to be authentic and relevant for the organization

Manage Talent

  • Hire Appropriately
    and select individuals with a passion, attitude, and competence to deal with sustainability issues
  • Make Sustainability a Way of Life
    and make it part of the job descriptions, goals, and benefits review process

Reinforce

  • Inform and Repeat
    the message over and over and over

These are all good practices, but will they really embed sustainability? First of all, nothing takes hold in an organization if it does not support both the business goals and the individual goals of the people who need to carry it out. If the ultimate goal is to please Wall Street by increasing profitability by 10% by cutting costs 3%, then no effort will be approved unless costs are reduced. Furthermore, if most managers and decision makers are compensated through productivity increases, and the most effective way to increase productivity is the least sustainable option, guess what option is going to be picked?

As a result, unless the organizational goals have sustainability embedded in them, and unless those organizational goals are mapped to unit goals that have sustainability in them, and unless those unit goals are mapped to individual goals that have sustainability in them, the chances of sustainability truly taking hold for the long term are going to be low. Thus, the organizational culture must first be tuned to sustainability. However, as we all now, just creating the right environment isn’t enough. People need to change — and this requires creating an atmosphere that not only supports the change, but that will support the inevitable hiccups that will result when any process is changed. So a change management initiative will also be required. And then the people have to want to change to truly make a big change. And how do you make people want to change? Incentives and rewards often work well, but those are specific to the types of individuals in your organization. As a result, no roadmap or 5-step plan will work as is. And if you don’t have a set of leaders who want the change to happen, it could be difficult to figure out what you need to do and get it done. And therein lies the challenge. So while I applaud the effort summarized in the report, is it enough?

Rampant M&A Does Not Indicate the Demise of Best-of-Breed

On the contrary, it symbolizes the emergence.

But let’s back up. A few months ago, Supply Chain Digest, with a piece on the Consumer Goods Supply Chain Landscape asked if Best of Breed [is] a Dying Breed. Noting an increasingly accelerated accelerated spate of mergers and acquisitions among leading supply chain best-of-breed solution providers, they called into question the long-term efficacy of some of these solutions, as well as the viability of these software companies themselves on the premise that there would soon be no best-of-breed vendors left for a consumer goods manufacturer to choose from.

If there were only N vendors, and the rate of M&A kept increasing, then, yes, we would reach an end-state where there were no best-of-breed vendors left. But this reasoning ignores one very important reality — most startups chase the biggest opportunity, which is typically where they perceive the most action to be. If the most action is in the M&A of best-of-breed, then new companies will see the most value in being best-of-breed and, as a result, we will soon see the emergence of a whole new slate of best-of-breed vendors. And while it’s true some won’t be sufficiently capitalized while others won’t hit upon the right technology, leading to their untimely demise, the reality is that a fair number will make it and that some of these, by the law of large numbers, will be even stronger than the remaining best-of-breed players today.

So, while the choices may be limited for the next year or two, the reality is that the number of options available to your average CPG manufacturer will soon explode. As for the other concerns, they’re not too worrisome either. Let’s take ’em one-by-one:

  • vendor future uncertainty
    Manugistics and i2 were considered market leaders and potential acquirers, not acquirees but were still acquired. The reality is that even a billion dollar enterprise can be swallowed up by a larger company, or, as a few spectacular acquisitions have evidenced, go from market leader to an almost forgotten business unit (like Netscape and Lucent) so this is not a concern restricted to best-of-breed.
  • ongoing support
    As most best-of-breed players have moved to (multi-tenant) SaaS or update subscriptions, which keep a customer on the current version, support is not the issue it once was. Plus, most will agree to code escrow, so, even if the vendor went away, the product could still be supported. Plus, once a best-of-breed vendor reaches a certain size, a number of consultancies acquire a competency and while resources might be expensive, support resources are not unattainable.
  • risks
    No solution is without risk. And a small best-of-breed vendor can be more financially stable than a large aggregator leveraged to the max and highly dependent on aggressive sales targets to meet payroll.

So don’t lament the recent M&A binge of best-of-breed players. It only means that new ones will arise and that more innovation is, eventually, on the way.

Maybe Some Bribes Should Be Legalized

Especially since it’s already legal to bribe corporations, and public sector entities. But let’s back up for a minute.

A recent article in The Economist that asks who to punish notes that India’s chief economic adviser wants to (partially) legalize some kinds of bribe-giving. And while your first thought might be bribes are bad, m’kay, it’s actually not a bad idea.

First of all, as Kaushik Basu (who is the chief economic advisor to India’s finance ministry) points out, it’s hard to combat bribery and corruption when the law treats both bribe-giving and bribe-taking as crimes. If someone needs a basic service to be performed on their behalf, and they believe they can only get it by giving a bribe, they will pay the bribe. And they won’t report it because then they can be prosecuted.

Secondly, the bribes he is proposing to legalize are “harassment bribes”, made by a person to get things done to which he is legally entitled. Like filing a police report or getting his tax return processed. Furthermore, Mr. Basu is also proposing that it would still be illegal for the individual demanding the bribe to perform the service to take the bribe. The bribe-giver would be able to file a complaint, and if proven, would be entitled to a refund while the corrupt official would be punished. Moreover, bribes made to bend rules in one’s favour would continue to be illegal for both parties.

This isn’t a bad proposal. First of all, it will make a corrupt official think twice before asking for a bribe knowing that it is much more likely he’ll be reported since it will no longer be a crime for the bribe-giver to give a bribe to facilitate a service to which he is entitled.

Secondly, most “civilized” countries have already legalized such bribes when made to a corporation or a public body. We just call them service payments. Don’t want your package to take four days to go from point A to point B when you know it only takes one, pay an expediting fee. Want more leg room, and actual food, on your flight? Pay an upgrade fee and sit in first class. Don’t want to wait 6 weeks for your passport renewal? Pay the expedite fee and get it in 3 weeks. In each case, you’re getting the exact same service. The only difference is time. Pay less, and you are put in the bottom of the queue. Pay more, and you are moved to the top of the queue. And instead of paying a person directly, you’re paying an organization, which then pays it’s shareholders and executives more money. And even though you don’t pay an individual directly, the individual who sells you the upgrade still benefits. They get to keep their jobs, which they would lose the minute revenue and/or profit drops below a certain threshhold.

Finally, in some countries, low level public servants, just like waitstaff in “civilized countries”, are not paid a living wage and need bribes to support their families. Making facilitation payments legal makes sense in those countries where foreigners have no choice but to pay bribes if they want to do business. One way or another, service has to be paid for. And if someone is truly corrupt, you want to make it possible for those impacted to complain without repercussion (unless they are seeking to break the law themselves). Mr. Basu’s proposal may not be perfect, but it certainly is clever.