Category Archives: Cost Reduction

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.

Finally, Someone Else Who Gets A Key Point of Working Capital Management!

Regular readers will know that SI has been ranting about all the hype-talk about Working Capital Management for years, including this post where the doctor got sick of all this working capital management talk. The simple fact of the matter is that most companies don’t understand what working capital management really is and mistake screwing suppliers (whether or not it is intentional) for lowering supply chain costs. The reality is that lowering your cost today is not good working capital management if it only raises your cost of acquisition tomorrow.

That’s why it was great to see this recent post over on Purchasing Insight on “Supply Chain Leakage – Stemming the Flow of Costs”. As per the article, when you calculate the scale of costs that leak from the supply chain, it reveals astonishing waste and it’s time that businesses — suppliers and their customers — took a closer look at collaborative techniques to take out these pointless costs.

As the article says, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party. If your cost of capital is 1%, and your supplier’s cost of capital is 10% or 20%, you’re just increasing your costs by 10% to 20% by paying late to save a paltry 1% or 2% cost on a short-term loan. The numbers just don’t add up.

True savings propagate through the supply chain. They are not limited to your organization.

Good Tips on Strategic Cost Management from the eSide

That’s right. “The eSide”. Not necessarily where you would expect them if you’re old school and always flipping to the b-Side, but that’s the beauty of high-tech. Even though the goal of Supply Management should be to increase value to the organization, the reality is that the C-suite in most organizations, big or small, global or local are still focussed on maintaining — or, preferably, reducing — the costs for procured goods and services. Plus, quick wins in these categories give the organization more leverage to take-on bigger, value-focussed, projects.

However, as the article notes, before you start, it’s worth noting that there’s a discernible difference between price reduction and cost reduction. Cost reduction is typically sustainable over the long term, while price reduction is often a short-term commercial concession, which is then typically reversed later when the power balance in the buyer/supplier dynamic changes. And, most importantly, managing cost with suppliers who can often considerably help with cost savings is complex and requires a lot of effort.

However, costs are controlled by drivers, and suppliers often have a better understanding of these drivers than your organization does, especially since your organization is typically buying components from these suppliers that are buying raw materials that are the primary components of your cost. And even if the supplier provides a cost breakdown that underpins the price structure, it can be very difficult to understand what the information is telling you. You need a cost model that allows you to provide repeatable analytic capability that lets you understand what the information is telling you and whether costs are going up or down or staying flat. And, as you know, this will require working with knowledgeable colleagues in other functions such as finance and engineering, and the best candidates for the latter will often be in your supplier’s organization. Plus, suppliers will often bring new and innovative ways of reducing cost to the table that might not have been considered previously. Especially if you explore looser specifications with suppliers to broaden the opportunity for cost reduction through innovation and generation of alternative solutions. Remembering that for manufactured products in particular, the majority of suppliers’ costs are incurred at their factories, the suppliers will often have the best ideas for cost reduction — which might come in the form of an alternative (easier to manufacture) design, different raw materials, or even a different manufacturing process.

Suppliers are your allies, not your enemies, and collaborative efforts, focussed on profit sharing, can be the best way to control cost for the long term.

Is Co-opetition a Good Thing for Your Supply Chain?

Not too long ago, the ISM ran a cover story on “Collaborating with the Competition”. In this article, they addressed horizontal collaboration, which is the sharing of supply chain assets for mutual benefits, and which is becoming common among some manufacturing groups. This typically occurs between companies in the same industry that, while not direct competitors, market and sell to similar customers and consumers. As an example, if one manufacturer made HDTVs and another made Blu Ray players, which do require similar raw materials and even chipsets for encoding and decoding, they could cooperate in sourcing because, while they are selling to the same consumer, they are not selling the same product. However, this is now occurring between companies that, at least in some product categories, often directly compete with each other. The case of Hershey Co. and the Ferraro Group, as pointed out in the article, is one example. “Higher-end” hershey bars and “lower-end” Ferraro chocolates are in the same price category and target the exact same consumer that will likely only buy one of these products during a trip to the store. This is an example of co-opetition in the supply chain.

According to the “North American Horizontal Collaboration in the Supply Chain Report”, published by EyeForTransport, while still in its early stages, the benefits [of horizontal collaboration] are clearly recognized and there are companies already optimizing their supply chains with this cutting-edge strategy. This is especially true if the collaboration is deep, and extends into sharing warehousing, distribution and even manufacturing capabilities. And of course, the collaboration is going to achieve efficiencies and savings beyond what either company can achieve on its own if you collaboratively optimize everything, as the article recommends. [This echos what the doctor has been saying for years. No other technology or process delivers the returns that optimization delivers, and the maximum effectiveness is always in a collaborative application.] But the real question is, what is the value that is going to be delivered? When you optimize everything within your organization, you maximize the value to your bottom line. But this isn’t necessarily the case when you optimize a joint supply chain.

Why? To understand the rationale, we need to take a step back to the predecessor of horizontal collaboration — the Group Purchasing Organization. The idea behind the group purchasing organization was that if a bunch of companies came together and pooled their total purchasing volume, they could get a better deal from a single supplier than each could on their own. (In simple terms, they are the enterprise version of today’s consumer GroupOn or TeamBuy.) This was true for each company if they all had volume requirements in the same order of magnitude and there was enough companies in the group to take the volume to the next order of magnitude (which, in manufacturing terms, is defined based on the throughput of a production run and the threshold at which manufacturing the product becomes cheaper). If one company had an order of magnitude more demand than the others in the GPO, then the reality is that it could get just as good of a deal if it had a good negotiator, and if a company had an order of magnitude less demand, then it was getting a way better deal than everyone else.

In addition, a deal is only a better deal if it doesn’t help a competitor more than it helps you. So if the GPO contained direct competitors, typically it was only used for buying indirect or non-essential products or services (like office suppliers, maintenance parts, and temporary labour services), and never for components or raw materials used in direct manufacturing. So the organization never saw the full value of what a GPO could deliver unless it joined a smaller GPO that prohibited direct competitors from belonging to the GPO. And then it still didn’t get the best possible deals across the board because smaller GPOs generally had smaller volumes, especially since not all companies were buying the same products or services, or they were not all ready to buy the same categories at the same time.

Co-opetition is taking the concept of a GPO to the next level. It’s essentially saying “why stop at products and basic services when you can also collaborate on warehousing, transportation, and manufacturing asset purchases and take GPOs to the next level”. And while this sounds good in theory, the reality is that you can really only collaborate this deeply with an organization in the same space as you making similar products, and maximum benefit (from an optimization viewpoint) will only be achieved when they are making the same category of products. And if the other companies are making the same categories of products, even if they are not directly competing (like tablets and laptops), they are probably close enough that they are vying for the same consumer dollars (as many consumers have limited disposable income these days), and if the products are that close, and your competitor ends up getting more efficiency gains then you, with the indirect knowledge of your products that they are going to acquire, what’s to stop them from creating a product that directly competes with yours, at a lower production price, using the supply chain you helped them build?

And yes, there are always legal precautions you can take, but first of all, you have to think of every eventuality and then, if the competitor is determined, be prepared for a lengthy, and costly, court case. In other words, the greater the savings are for you, the greater the value your competitor is likely to see. Is it worth it? the doctor doesn’t have the answer, but thinks it is very important that you ask the question!

How Much Does That Enterprise Supply Management Solution Really Cost, Part II?

In yesterday’s post, we asked how much an enterprise supply management solution really costs because the up-front license cost or annual subscription fee is only one part of the puzzle — and until the full puzzle is understood, it’s hard to figure out what the true cost is and, ultimately, what’s the right solution for the organization. The difficulty is the plethora of license models, and add-on fees, that have been invented by on-premise and SaaS/Cloud vendors over the years in an effort to get a leg-up on their competition (and a siphon into your corporate piggy bank). In today’s post, we’re going to review three proposals from three vendors, Siphon, Skimmer, and Drip. Then, we’re going to demonstrate how to compare them on equal footing.

Siphon is proposing an on-site enterprise solution with a perpetual license cost of 50K plus 100 per user, an implementation fee of 20K, an up front customization fee of 15K for reporting, 25% maintenance, and up-front training of 10K for administrators and 20K for users. It also requires a database, application server, and a middleware license — which have their own maintenance fees. It also requires (3) servers to host the product, space in the data centre, an administrator / developer to maintain the customizations, and a user support person.

Skimmer is proposing a hosted ASP solution with a perpetual license cost of 50K, an additional fee of 50 per user, an additional fee of 1K per integration, and a small transaction fee of $1 per transaction. Maintenance is 10%, but the initial implementation cost is 40K, not counting the 20K for custom reporting or 20K for integration with external systems. User training is 20K up-front.

Drip wants to go pure multi-tenant SaaS for a hosting fee of 40K a year, with 30K up front for implementation, 20K up front for custom reporting, 10K for external systems integration, and 20K up front for training. However, ongoing training, largely self-led, is minimal at 5K / year.

On the surface, Drip sounds expensive if you’re looking to make a 5-year commitment because it’s 200K in license fees, as opposed to 50K for Siphon and 50K for Skimmer, but Skimmer has over 100K in additional up front costs (bringing your down-payment to 150K) and Siphon has at least 75K of up front implementation costs (bringing the total to 125K) plus whatever it costs for the database, app server, and middleware.

The only way to really understand what the respective costs are is to build a detailed cost model that allows for an apples to oranges to pears comparison that allows for similar elements to be compared on an equal footing when possible, and total cost to be understood.

To this end, you need to build a cost matrix similar to the one below (which is contained in this free cost model spreadsheet [that you can use at your own risk*]) so that you can determine the true cost of the solution over the time-span you expect to use it. (Be it the 1, 3, 5, 7, and 10 year time-frames pre-calculated, or some other time-frame). Then fill in the gaps.

For starters, with respect to Siphon’s proposal, we have to cost out the database, application server, and middleware. When we do that, we find that the db license is 15K plus 30% annual maintenance, the application server is 10K plus 25% maintenance, and the middleware server is 20K plus 20% maintenance. Plus, we need to buy 3 servers to support it — one for the application and middleware, one for the database, and one for the web application server. Digging deeper, we find out that it needs five custom module integrations, and each will cost 2K, tacking another 10K onto the proposal in addition to the 10K required to integrate with external systems. Digging into the support requirements, it’s going to require 50% of an admin’s time, and that person costs 90K a year, and 100% of a support rep’s time, and that person costs 60K a year. The servers will consume about 6K of power, an additional 3K of backup services will be required, and the annual maintenance on the database, middleware, and app server will cost 5K, in addition to 5K of annual training to keep the admin up to date.

Skimmer, being a hosted ASP solution, also requires an annual hosting fee of 20K for data centre costs in addition to the 50K perpetual license cost, and an additional fee of 10K in each subsequent year for training.

Drip, being a pure multi-tenant SaaS, has no other costs.

When we put it all together, we end up with the table below:

Cost
Components		 On-Premisee Hosted ASPP SaaS
Perpetual License (K)
Flat Fee 50 50 0
Per User 0.1 0
# Users 100 0
Per Module 0 0
# Modules 5 0
Per Integration 2 0
# Integrations 5 0
Per Server 0 0
# Servers 3 0
Total 70 50 0
Annual Hosting Fee (K)
Base Fee 0 20 40
Per User 0 0.05
# Users 0 100
Per Module 0 0
# Modules 0 5
Per Integration 0 1
# Integrations 0 5
Per CPU Hours 0 0
# CPUs 0 0
Per Transaction 0 0.001
# Transactions 0 300
Total 0 30.3 40
Maintenance % (0-1) 0.25 0.1 0
Equipment Up Front
Server Count 3 0 0
Server Cost (K) 8 0 0
Server Life-Span (Yrs) 3 0 0
Total 24 0 0
Mandatory Software
Perpetual DB License (K) 15 0 0
DB Maintenance % 0.3 0 0
Perpetual App Srvr License (K) 10 0 0
App Srvr Maintenance % 0.25 0 0
Perpetual Middleware License (K) 20 0 0
Middleware Srvr Maintenance % 0.2 0 0
Total Software (K) 45 0 0
Total Maintenance (K) 11 0 0
Implementation Cost (K) 20 40 30
Ext. Sys. Integration (K) 10 20 10
Custom Report Development (K) 15 20 20
Upfront User Training (K) 20 20 20
Ongoing Training (Yearly) (K) 10 10 5
Data Center Costs
Admins/Developers Rqrd 0.5 0 0
Annual Salary (K) 90 0 0
Support Reps 1 0 0
Annual Salary (K) 60 0 0
Power (K) 6 0 0
Integrated Systems Maintenance (K) 5 0 0
Backup Fees (K) 3 0 0
Ongoing IT Support Training (K) 5 0 0
Total 124 0 0

And then when we summarize the costs, breaking them down into first year and subsequent year, we get the following summaries:

Up-Front
First Year Costs		 On-Premise Hosted ASP SaaS
Perpetual License 70 50 0
Equipment (Computer) 24 0 0
Mandatory Software 45 0 0
Base Implementation 20 40 30
Ext. Sys. Integration(s) 10 20 10
Custom Reporting 15 20 20
User Training 20 20 20
Year 1 Data Centre 124 0 0
Year 1 Hosting/Subscription 0 30.3 30
Total Up-Front 328 180 110
Ongoing Yearly Operating Costs On-Premise Hosted ASP SaaS
Hosting/Subscription 0 30.3 40
Maintenance Fees 17.5 5 0
Mandatory
Maintenance Fees		 11 0 0
Equipment Upgrades 8 0 0
On-going Training 10 10 5
Data Centre Costs 124 0 0
Total Yearly 170.5 45.3 45

And then we quickly see that, in the first year, SaaS is the cheapest and On-Premise the most expensive and, more importantly, that going forward, On-Premise is considerably more expensive due to high data centre costs. We also see that, overall, SaaS will be the cheapest solution but this doesn’t mean it is the right solution as the cost of Hosted ASP and SaaS in subsequent years is almost the same, and if the Hosted ASP provider can offer substantially greater security and reliability with the single instance they are offering (as opposed to the multi-tenant SaaS solution), it might be worth the additional 70K up-front cost for the Hosted ASP solution — especially if the company is looking to commit for a longer term (like 5 years). Plus, With the costs so similar, a negotiation might be able to reduce the base implementation and integration costs, putting the Hosted ASP solution on par with the SaaS solution. However, none of this would be clear without this total cost calculation. So do your homework, and your detailed year-over-year costing, before selecting a solution. It will pay off.

* All warranties or representations, express or implied, are disclaimed and you take complete responsibility for the use, or misuse, of the template.