Category Archives: Cost Reduction

Are You Ready for the 4th Quarter Crunch?

Even though businesses can choose their own fiscal years, many choose to coordinate with the calendar year. As a result, the 4th quarter is now upon them, and, in any company that is not best in class, a lot of people are getting anxious about meeting their numbers. It happens every year, and even if I’m not oot and aboot (NSFW*), I see it indirectly every year in the 4th quarter slump (when blog stats take a temporary dive).

And this year, many supply management professionals have good reason to be worried. While the economy has started on the road to recovery, the road is full of potholes and, with the impending U.S. election, we don’t know what’s going to happen and whether or not the U.S. Congress that is elected on November 6 is going to vote to raise the debt ceiling or take the U.S. over the fiscal cliff. Given the lack of sound economic and global trade policy since Clinton left office, it’s hard to say what’s going to happen.

The issues is that many of these professionals did’t plan for the rapid increase in some commodity cost categories, talked about risk but never took mitigating actions, and didn’t take the time to upgrade their skills so that they could continue to do more with less (as we all know that even though many companies are spewing the talent talk, they aren’t engaging in the talent walk [and will be surprised when the market eventually rebounds and their top talent walks out the door, but that will be another post]).

But the year’s not over yet, and there’s still things they can do to not only mitigate the “damage” that is expected as year-over-year spend increases, but contain costs and demonstrate their ability to add more value to the organization before the year is up.

Three things in particular that they can do right away are:

  • Have Finance Agree to Better Cost Savings and Avoidance Metrics
    As discussed in yesterday’s post, savings on categories negotiated this year should factor in (index & formula based) commodity rate increases and exchange rate fluctuations and cost increases on spot-buys should be calculated using similar year-over-year comparisons. This way, even if the Sourcing team couldn’t get to as many categories as they’d like, and savings were less than anticipated, a better, more realistic, picture is painted.
  • Start Monitoring Contracts and Supplier Performance more Actively
    Has the supplier been billing at contract rates, honouring discount levels, and shipping on time with an acceptable defect rate? If the supplier is over-billing, if discounts are missed, and if shipments have to be constantly expedited at higher costs, the savings that were negotiated evaporate rapidly. Increasing the rate of savings capture across all high-spend categories will go a long way to meeting targets.
  • Take some online / distance training that can be done after hours
    Increase your skills, increase your efficiency, increase your supply management opportunity astuteness, and do better at every task you do. There are a number of options, and some, like Next Level Purchasing, offer certifications recognized to various degrees around the globe.

And then they can start planning for next year by pushing for the acquisition and implementation of better technology and the transition to new and better processes.

* But hilarious!

How do you measure savings?

It’s a tough question, but if you’re good at what you do, and you want to “win” at the end of the year, be sure you factor in currency fluctuation, inflation, and, if necessary, demand shift, because, on a per-unit basis, you can always save against market average if you’re good at your job and normalize the expenditures.

Here’s the foundation for a simple formula you can use to make this measurement. In reality, it will be a bit more difficult as you’ll have to calculate the actual increase in cost due to a change in the commodity index (as the commodity will only be one cost component in the total cost of the good being purchased), the realized difference in the exchange (as the currency conversion may cost you additional basis points), and the demand shift relative to a fixed interval, and not a fixed point, in time. But this simple example will suffice to show how, if you calculate appropriate unit costs, you really can’t lose even if the overall spend in the category goes up (because, without your efforts, it would have went up a lot more). And this is just fine (as long as you don’t double count the savings some other way).

Let’s say that, using appropriate benchmarking, backed up by indices and correlating cost models that are accepted by finance as reasonable, you calculate that the average market price per unit is $12 and you sign a contract for $10, for an expected savings of $2. Then, a year later, you find that the result of commodity inflation increases the cost per unit $1.20, for an increase of 10%, and the currency exchange increases $0.05 not in your favour, for an increase of 5%. What have you saved?

Savings/unit = (market cost/unit) – amount paid * (1 + currency increase) = 13.2 – 10 * 1.05 = 13.20 – 10.50 = 2.70

  market cost / unit = (base price/unit + cost increase/unit)

% Savings/unit = (savings/unit) / (market cost/unit) = 2.70 / 13.2 / 20% (WOW!)

Now, let’s say next year, you agree to a price increase to $10.50, but inflation increases unit costs by another $1.80 and the currency exchange only falls to $0.03 not in your favour. How did you do year over year?

Savings/unit = (13.2 + 1.80) – 10.5 * 1.03 = 15 – 10.5 * 1.03 = 4.19

% Savings/unit = 4.19 / 15 = 28% WOW!

  Costs increased 10%, but you increased your savings of 20% against market average to 28% against market average year over year! Looking at the big picture makes a difference since accepting 50% of the cost increase saved you considerably in the long run as prices continued to rise.

Procurement Value Creation Ideas, Part II

Recently, over on StrategicSourcing.com, Mickey posted her thoughts on “Procurement Value Creation Ideas”, highlighting four areas in particular that she thought were good targets:

  • Revenue
    Does your Supply Management team understand the value that needs to obtained from suppliers to bring innovation to products, materials, and business processes? Does sourcing reduce time-to-market for new products and services?
  • Costs
    Does Supply Management extend their focus to supplier variable and fixed cost structures, which materially contribute to the suppliers’ product and service costs?
  • Working Capital
    Does Supply Management understand the company DSO, ITR, and DPO equations and their interrelationships? [Days Sales Outstanding, Inventory Turnover Rate, Days Payable Outstanding] Does your Supply Management team work towards improving the ITR and balancing DPO with DSO? Does Supply Management Team contribute to S&OP? [Sales and Operations Planning]
  • Fixed Capital
    Does Supply Management play an active role in capital expenditure management? Are maintenance and service standard items contained in contracts and purchase orders?

These are great ideas, and a great start, but not all of Supply Management’s value creation potential is immediately realized, and not all can be easily measured in the revenue, cost, or capital management equations.

Consider:

  • New Market Identification
    By the time you identify the market, identify the proper products services, design them, source them, and sell them, it will be a while before you can measure the effects on revenue. Even costs will be difficult to measure as they will decrease as efficiency and volume increases.
  • Brand Building Potential
    Sometimes, the right supplier can enhance your brand, and decrease the marketing cost and effort require to enhance your brand the same amount. This can be very hard to measure, but Supply Management will be critical in obtaining the right relationship with this supplier.
  • Alternate Material / Component Identification
    A Supply Management team that keeps tabs on the market may not only be able to identify more cost effective alternatives, but also more sustainable / environmentally friendly ones, which could boost your brand image and lower your long term costs and risks.

Supply Management can do more than just impacting the top and bottom lines in the short term, and do more than impacting these lines in the long term. It can improve your image, increase organizational stability, and lower your risk. Don’t forget this.

Will Factories in a Box Revolutionize Sustainability Initiatives?

Gizmodo just ran a very interesting, and vey insightful article on how “The Next Industrial Revolution Starts in this 20-foot Shipping Container” about Re-Char and their “Shop-in-a-Box” that can perform rapid fabrication of steel parts by way of software and a CNC plasma torch. With the Shop-in-a-Box described in the article, Re-Char can produce 600 lids for Climate Kilns. This is a specialized lid-and-chimney integration that adapts a 55-gallon drum to produce the soil amendment biochar. (In Kenya, farmers burn sugarcane debris in an open field and release tons of carbon. A Climate Kiln controls the burn to produce the carbon-rich charcoal biochar that, mixed into soil, reduces the fertilizer requirements for crops by half.) This required the precision cutting of 18-gauge metal, which, in East Africa, leaves you the option of using a guy with an oxy-acetylene torch on the side of the highway or importing a full production run out of China, one full shipping container at a time. But for 30,000, Re-Char was able to produce a Shop-in-a-Box metal cutting and joining setup that could be run by two two people and produce 600 lids as a time, when needed, where needed (as the shop in a box can be moved to a new community when the needs of the current community have been fulfilled).

From a sustainability perspective, this is incredible. It’s lean, green, and completely against the routine. Actually, lean is an understatement. The power requirements are limited to what is needed to produce the lids. The energy required just to light, cool, etc. an average factory typically takes a 600 V feed … or two … or three. It’s green in that it can be powered by sustainable energy, including wind power, water power, or solar power – whatever is available. (Transformers come with the standard kit, along with generators for [natural] gas power for stability. Just add batteries and a UPS and it’s 100% green power most of the time.) And it’s completely against the routine. When the industrial revolution started, you can be that the robber barrons never predicted a moveable factory.

To date, the most (wide-spread) innovative use of containers has been data center modules, with Google a leader in this technology. (But this has been taken to the next level. For example, Green Data Center has designs for completely self-contained data center modules that you can drop anywhere. Just hook-up a power feed and an internet feed, and you’re literally good to go. (And since you can easily put a generator, or two, in a second container, you don’t even need a power feed. Just a natural gas feed, split between a couple of generators if you don’t have a sustainable power feed, for a primary feed.)

But we don’t have to stop at data centers and steel-part fabrication shops. Especially when we are talking about the developing world (which still includes much of Africa, South America, and parts of Asia). Do we really need to refine cane sugar 2,200 kgs at a time, for example? Or how about water purification? If we’re talking about a small community of a couple of hundred people, and the primary focus is clean drinking water, we don’t need to purify 100,000 liters a day! Purifying 1,000 liters would do nicely! Both processes would fit nicely in a container system. (After all, the sugar refinement process is not radically different from micro-brewing in terms of what is needed, and you could fit that nicely in a container too — although we can’t necessarily bring the same humanitarian arguments if we did.)

And when we’ve insured that everyone has the absolute necessities of clean air, clean water, and healthy food — we could ship them clothing factories in a box. It doesn’t make sense to sew shirts in sweat-shops on another continent just to ship them to small communities in Africa, or South America, or Asia, where the living wage is $2 a day or less. Considering the shipping costs alone, you couldn’t set the price at a point where you’d make many sales. Just ship a container to the town, train a few locals on the cloth-cutting production lines and find a few budding seamstresses to do the stiching, and produce the clothing where it will be sold. A zero-mile supply chain that emits zero-carbon and has zero shipping costs. And since you don’t have time-sensitive fashion industries in developing economies, you could even rotate it between a few small communities in the beginning while the consumer base and local economy built up. (Hopefully you’d also move the employees too if they were willing, as you could outfit another container as temporary living quarters without much cost or effort.)

I think the physical manifestation of the Solution-in-a-Box approach has the potential to revolutionize manufacturing, distribution, and sustainability. And it’s not like we have a shortage of containers thanks to the outsourcing craze of the last fifteen years. They’re just sitting there waiting for a good use. And with all the super-panamax ships, and super-panamax capable ports, that we have at our disposal, we can get them from any continent to any other continent with ease, in bulk, and pretty close to where we want them. And then we just need a freightliner to haul them, and there’s no shortage of those.

Robbie and the Coupa Factory

Oompa Loompa Doom-pa-dee-do
We’re still building great products for you!
Oompa Loompa Doom-pa-dah-dee
If you are wise you’ll try it for free.

What do you get when you get lots of cash?
Filling coffers and enlarging the stash?
Teams of developers coding like mad!
Making the app work on your iPad.

You’ll like the look of that!

It’s been a long time since Davie ran the Coupa Factory, and while there may have been a number of notable changes in management, one thing hasn’t changed at Coupa — and that’s the original product direction (and the heart of the development team*). Coupa’s goal is still to make the best P2P platform out there that’s so easy to use that even your grandmother and three-year old can use it and get all your spend under management (SUM).

In terms of progress since our last major review of the platform in 2009, which focussed on QuickStart, there has been a flurry of development — of a very interesting sorts. Having built one of the richest web-based P2P platforms on the market in three short years (with everything capable of being custom configured by an administrative user), Coupa made a very important realization — 90% of P2P is simple, straightforward, and limited in terms of required functionality. Find what you need, put in a requisition, get approval, cut the PO to the vendor, accept delivery, accept the invoice, queue it for verification and approval, issue the goods receipt, and make payment within the agreed upon timeframe when the invoice has been verified and the goods accepted. There’s not a lot of inventory management, logistics, payment structuring, etc. in an average corporate purchase made by an end-user outside of the Supply Management organization.

What there is, in fact, is a lot of bypassing of e-Procurement systems that make the process of getting your printer, paper, or widget for your production line more troublesome than going to the Best Buy website, the Office Depot website, or just calling up the supplier and asking for another shipment. So, if you want widespread adoption, which is the key to maximizing your SUM (Spend Under Management), you have to make it at least as easy to use as Amazon. Whether you’re using vendor catalog, punch-out, cXML, or an in-house catalog, searching, shopping, and requisitioning is seamlessly integrated. And it’s all accessible through their new Super Search Bar that seamlessly integrates Google search for what you need, Amazon browse by category, and free-form item/service search (which also allows product/service retrieval through internal or vendor product/service numbers) which can be global, by commodity, category, or vendor — depending on your configuration. Plus, their new dynamic shopping cart, which integrates accounting and budgeting data (so you know against what budget item a requisition will be charged, how much is left on the budget item, and how much will be left when the requisition is approved the minute you add an item to the cat), allows for split-billing and overrides in the cart in a process that is as easy as Amazon’s “one-click” checkout. And, policies can be linked to each item and service that allow for additional information within a search to be “popped-up” so the user can get full information (which can include budgetary and billing information) before an item is even added to the cart. Supplier taxes can be imported and validated against your own tax tables, fending off future nightmares for finance down the road. And when all is said and done, payments can be recorded and integrated with you ERP (and Coupa now supports out-of-the-box integrations with a couple of dozen major ERP and e-Procurement platforms).

Upon checkout, the system will automatically create the necessary requisitions (which will be sent to each individual who needs to approve an item in your master requisition), and, upon approval, the necessary POs for each vendor will be automatically generated and delivered — and all are easily accessible from your order history page with a single click.

The other big developments since our last major review are their Expense Management Solution, which was still in its infancy, and their new Spend Optimizer Solution, which could more accurately called a 360° Spend Visibility solution (which you can use as a starting point in spend analysis and spend optimization). Their Expense Management application is a great way to get your T&E under control (as iPhone integration allows expense reports to be automatically generated by users who simply have to take a picture of their receipt and import it into the application). They’ve taken usability to a new level with this one.

Spend Optimizer is their mega-dashboard reporting solution that is completely configurable and allows for the creation of just about any spend report you can dream up. Done right, you can have it display off-contract spend; late payments; budget overruns; high-spend categories, commodities, and vendors; and other spend hot-spots that could get you or your organization into hot-water down the road if not proactively managed by exception. It’s still a dashboard (which can be dangerous and dysfunctional), but you have the option to see green, see red, or see where the black holes are. It’s this last capability that makes the real difference between useless reporting tool and powerful spend miner, because, generally speaking, off-contract is where the trouble starts.

And brand-spanking new functionality is lined-up for fourth quarter. Their recent announcement that 9.635 Billion has passed through their platform is impressive, but when they pull off their next round of application development, that will be more so. Coupa is still a company to watch, so don’t take your eyes off them for too long.

Oompa Loompa Doom-pa-dee-do
They’re still building great products for you!
Oompa Loompa Doom-pa-dee-dar
They have the goal to take your spend far.

* Dave and Noah may be gone, but David Williams is still there as VP Technology, overseeing day to day development.