Category Archives: Cost Reduction

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

Pardon my language, but GFQ: Good Fracking Question! With the way that most providers price these days, it’s really hard to tell and bravo! to Chain Link Research (CLR) for taking up the issue in a recent 2-part piece on SaaS Pricing: Insanity or Good Deal for Users (Part One and Part Two). When I first broached the subject back in 2009 in my series on An Enterprise Software Buying Guide (Part I: Overview, Part II: Cross Functional Team Formation, Part III: Need Identification, Part IV: Potential Solution Identification, Part V: Cost Model Definition, Part VI: Cost Model Calculations, Part VII: Negotiations and Part VII: Contract Definition & Management), I thought I was the lone crazy voice talking to the cat in the corner that wouldn’t listen because, at the time, everyone thought SaaS was always cheaper and the wave of the future. (Sometimes it is, sometimes it isn’t.) The reality is that 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.

As the CLR articles point out, the first thing you have to figure out is what you’re buying. Is it on-premise, hosted ASP, or SaaS/Cloud, and then, more importantly with respect to today’s cost models, is it enterprise or community? I.E. Is it 100% internal to your organization or does it allow you to connect with different organizations within the extended enterprise as well as supply chain partners? Is the price fixed, per usage metric, or based on Spend Under Management (SUM)? If your organization only has 20% SUM today but is buying the solution to get to 80% spend under management, then the cost of the solution is going to quadruple overtime. What sort of user connectivity is supported? Is it in-house only? Remote? Multi-location? And, today, multi-device? (Executives want everything, whether it makes sense or not, to work on their iPad and/or iPhone.) How secure is it? And how much hardware and/or how many data centre resources are going to be required to support it?

If it’s on-premise/hosted ASP, is the license perpetual or for a limited term? If it’s SaaS, is it single-tenant or multi-tenant? What sort of availability or security assurances are there? Is anything being outsourced?

And then, once you get a grip on the basic delivery model, you need to start coming to terms on how the solution is being priced. For SaaS, what is the frequency of subscription payments? What is the payment based on — site license, number of seats, number of transactions, CPU utilization, bandwidth utilization, storage requirements, and/or dollar volume processed? And what are the up-front costs? Is there a one time integration or implementation fee? Any customization fees? Any training fees? The list goes on.

Similarly for enterprise. Is the license fee fixed-term or perpetual? Site license, by user, by server, or by CPU? Does it require any middleware that must be licensed separately? What is included in the way of implementation and integration? In terms of user training and, more importantly, site administrator / developer training? How much customization is required? The list goes on.

For an average business user trying to select the best solution for the business, it’s like trying to compare apples to oranges (which can be compared, by the way — see this post) to processed fuel (which is of an entirely different composition and has an entirely different production cost model, unless, of course, it’s corn-based ethanol). But there is hope! Stay tuned for Part II!

Have You Reached the Summit of Cost Cutting?

Cost cutting has been a major focus of your average Supply Management organization for most of the decade. A few efforts have been focussed on the long term, but the majority have been short-term efforts. And this is not a good thing, because, as Patrick Dunne of Alliance Boots said in a recent article over on the CPO Agenda on “Reaching the Summit of Cost Cutting” everything has to be a long-term activity. Every strategy within a Procurement world, or cost-based management as I like to call it, has to have an end-state.

In a strategic Supply Management organization, delivering a cost conscious culture is the long-term objective, everything in-between, short-term, or medium is initiatives, tactics and strategies towards that cultural change. As Daniel Baun Christensen of Lego says, there are no quick wins as such. Successful Supply Management is all about collaboration. Your customers in your organizations are your stakeholders and if you don’t get aligned there are no quick wins and long-term wins. There is no ‘one size fits all’ in procurement.

But when you engage with the larger business, as Ron Needham of SAP found out, you expand your thought leadership and do a better job of being viewed by the CEO as professionals rather than just the folks who have to save money on pencils. By working alongside the marketing, sales, and IT teams to communicate the role of Supply Management and the value it can bring, you see the stock of the internal Supply Management team increase. For example, they were able to institute a bring-your-own-device initiative, frightening to IT in terms of security and liability, which had the net effect of lowering IT spend and increasing environmental sustainability (as you no longer had executives who needed to carry work devices and home devices).

I take these quotes from the article to make a point — there is a need, and an advantage, to focussing on long term cost cutting and not just short term cost cutting. And if you truly believe that the recession is ending and this is going to be a better year, then now is the time you start. You should have started years ago, but I know that most of you reverted to, or stayed in, the cut-costs-now mentality being forced upon Supply Management by short-sighted C-Suites that should have focussed on the long-term the last time things were good instead of chasing unreasonably high profit margins to increase their Wall Street valuation.

The reality is that the 11% savings enabled by Spend Analysis and 12% through advanced sourcing / decision optimization technologies are not repeatable on the same categories year-after-year. They only deliver these savings because average contracts are 3-5 years and its typically (at least) that long before an average category comes up for evaluation again. As with auctions, savings will deteriorate unless your sourcing strategies are taken to the next level (through VFS or Collaborative strategies), and this next level requires two things:

  • supplier involvement and
  • long-term thinking.

And, unless you take your sourcing strategies to the next level (and take the first step on your next level supply management journey [registration required for download]), you may find, that in these turbulent times of rising commodity, freight, and regulatory-related supply chain costs, you may have just reached the summit of cost cutting.

If You Do Not Get Sustainable Results, Blame Yourself!

Let’s Talk!

It’s deja vu all over again!

Robert Rudzki is not the only blogger and consultant to recently hear that a potential client had, just a few years ago, hired a large consulting firm to do a high-profile “strategic sourcing program” with nothing sustainable to show for it, as he indicated in his recent SCMR blog post on Deja vu all over again. I’ve heard the same sentiments echoed to me by a number of consultants at a number of small and mid-size niche and specialty services and software providers in the e-Sourcing & Supply Management space in recent months.

It would appear that a common trend last time money flowed into laggard Supply Management organizations before the recent downturn was to simply hire a Big-X consulting firm to fast track the organization to strategic sourcing success. While this is a great way to fast-track a project, and a contract, that is expected to result in significant savings, the only thing that is fast-tracked from a finance perspective is payment to the consulting firm that runs all the way to the bank! As leading Supply Management professionals know, a contract does not guarantee savings. The only way to achieve savings is to execute against the contract and make sure savings are realized. Just because you have a new contract that allows you to source widgets at $8 a pop, instead of $10 a pop, this doesn’t mean you are going to save $200,000 on your annual purchase of 100,000 widgets. For the savings to materialize, all of the following has to happen:

  • the buyer has to place the order with the contract supplier
  • within the contracted lead-time and the supplier
  • has to ship on time
  • using the approved carrier and shipping arrangement
  • and pay all required third party and government export fees
  • and file all appropriate paperwork at the same time your organization, or a 3PL acting on your behalf,
  • files all of the appropriate import and compliance paperwork
  • and pays any associated duties to make sure that
  • the product arrives at the warehouse when its supposed to
  • where it is received, inventoried, and appropriately stored which results in
  • an invoice being accepted and verified against the contracted rates and
  • paid at the appropriate time only when all goods are received and verified as acceptable.

Simply put, if

  • the order is placed with the wrong supplier
  • or placed late and the order has to be expedited
  • or shipped late and a different shipping method has to be used
  • or export documents are not filed on time
  • or fees are not paid and fines are issued
  • or import documents are not filed on time
  • or taxes are not paid and fines are issued
  • or the product is not properly inventoried or stored and can’t be found and unnecessary replacements
    need to be ordered
  • or the invoice is not verified and the old rate is still being charged
  • or the invoice is paid late and a penalty is applied

then those (significant) savings negotiated on your behalf go out the window. And you’re not going to get them back! First of all, once they’re gone, they’re gone. Secondly, because you weren’t actively involved in the project and didn’t insure that the knowledge that you required to achieve a sustainable transformation was transferred, you’re not going to be able to keep costs down when you renegotiate the contract in this economy where supply is tightening and costs are rising. So you’ll pay even more, even if the rate should stay almost flat.

In order to get results, you have to work with the consultants to understand the strategic sourcing process, the strategies applicable to your organization, the goals of each individual project, the savings opportunities in each project, the key contract terms, the changes that need to be made to capture the savings and adhere to each
contract term, the key metrics, the measurements that need to be made regularly, and the warning signs that something is happening / has happened that could jeopardize the savings the organization expects. Failure to do any of this is a sure-fire way of making sure that nothing changes and that your organization continues to leave money on the table.

In short, if your organization continues to be one of those organizations that leaves up to 40% of the contract value on the table because you did not do all of the above, don’t blame the service provider unless you did all of the above. As Charles, Bill, and Bob said in their recent books on The Procurement Game Plan, Managing Indirect Spend, and Next Level Supply Management Excellence, success is your responsibility and you have to actively manage your service providers and make sure that the knowledge required for a sustainable transformation is transferred to you.

Should You Hedge Your Transportation Costs?

It’s a tough question, and one that you need to answer sooner rather than later. If you read this recent article on how “global shipping lines grapple with plunging rates, overcapacity, and faltering recover”, you realize that the global shipping industry is likely in for a very shaky ride over the next few years given the unpredictable demand, the strong likelihood of consolidation, and the big bets some major shippers are making that could intensify the current overcapacity problem.

The following tidbits of information in particular are worrisome:

  • GDP growth forecasts for Canada in 2012 have recently been revised downwards by various analysts to just above 2%
    Canada, which has done quite well in weathering the global economic storm (through better bank regulation, smarter risk aversion, and a focus on natural resources) is barely going to grow. Imagine how the Eurozone and the USA are going to fare in 2012.
  • China growth, while in the high single digits, is slowing
    When GDP growth in the country that houses one-sixth of the world’s population and that is still on track replace the USA as the dominant economic superpower in under fifteen (15) years is slowing, what hope does the rest of the world have for a quick recovery?
  • The dollar still drives decisions. Green is of secondary importance.
    With little incentive to look at new technologies, there is little incentive to look at sustainable solutions that could be more cost effective in the long run. (Such as more efficient engines, on-board solar and wind power, etc.)
  • Maersk, which ordered 10 Triple E vessels capable of carrying 18,000 TEUs in February 2011, ordered 10 more mega-vessels that will cost US $190 Million in late June.
    All of these vessels are bigger than the 15,000 TEU Emma Maersk, which will remain the largest container ship on the high seas until 2013 when the new ships are deployed. But where is the volume going to come from to fill them?
  • Maersk is betting that Asia-Europe trade will increase by 5% to 8% annually over the next four years.
    China’s GDP growth is around 9% and falling. And not all of that is due to trade. The Eurozone is dealing with one financial crisis after another, and no other country in Asia is going to keep up with China.
  • Box freight rates on the Far East-Europe spot market have plunged below zero after stripping out bunker surcharges. Worse, the rates will continue dropping as the big carriers engage in a “destructive” rate war.
    Price wars always have casualties.
  • Net rates are now lower than during the darkest period of the 2009 container slump.
    Rates have no where to go but up (although they may not start rising until we have a few price war casualties).
  • Alphaliner estimates that idle container ship tonnage will climb above 500,000 TEUs by the end of December.
    To put this in perspective, that’s 19.25 Million m3 of idle cargo space which could hold approximately 33.258 Trillion iPad 2’s in the box, if Foxconn could produce them all. (This is 4.75 iPad 2’s for everyone on the planet.)

Put all this together, and you see that:

  • (Some) carriers are going to go out of business.
    It could be yours!
  • Shipping lanes are going to close.
    Carriers will have to drop low volume lanes and consolidate volumes to keep costs down and stay in business.
  • Rates are going to go up.
    As those carriers that don’t go out of business will have no choice to raise rates if they stay in business, even with lane consolidation and elimination of discretionary and low-volume ports.

If you don’t have a ocean freight backup strategy, it’s time to get one, and if a delay could cause you a significant loss or increase in rates as you scramble to divert cargo to a higher cost carrier, it might be time to hedge your bets. the doctor may not be an expert in ocean freight, but this crystal ball is not very hard to read.

Some Takeaways from the E2Open sponsored SCM World Collaborative Execution Study

SCM World recently released a study on “Collaborative Execution” (defined as two or more parties working together to improve supply chain performance by continuously solving real problems with better information), focussed on Speed, Innovation and Profitability, overseen by Kevin O’Marah, and sponsored by E2Open that had some rather interesting, and in a few cases, surprising results. First off:

For suppliers, collaboration is primarily a means by which their customers share demand information, with 73% strongly agreeing this is a key aspect of collaboration.

For buyers, an overwhelming 83% believe collaboration revolves around the supplier sharing availability information (e.g. capacity, lead times, etc.).

In other words, both sides agree that collaboration centres on information sharing and, furthermore, the study also found that,
both sides need visibility and want a dedicated problem solver.

This means that the primary barrier to collaboration between most supply chain partners is the fact that companies struggle to share information effectively, with 54% seeing lack of data visibility across trading partners as a perennial problem. Furthermore, the next biggest barrier was speed of issue resolution, with almost 50% agreeing that this was a barrier to effective collaboration. (In addition, 92% agree that quick problem resolution is part of good collaboration.)

But the most surprising result of the survey was that trust, governance, and benefit sharing were not the biggest barriers to collaboration, as commonly suggested, but the ability to connect trading partner information flow, insure quality of information, and synchronize that information for quick problem solving. (For example, almost one half of respondents felt granularity of data was a problem, speaking to the quality issue, and almost one half of respondents saw timeliness of information as a problem.) This says that, for the most part, it is not lack of desire, trust, or willingness to collaborate that is the problem, but a lack of technology to enable collaboration. (And this is a shame, considering that such technology has existed in more than adequate form for at least five years now for even the largest of multi-nationals with the most complex supply networks. It may take some effort to get used to some of the technology, which is only now maturing on the usability front in some cases, but how much of a barrier is it really to spend a few days learning a technology that is going to cut your issue resolution time in half and decrease your risk substantially?)

Given that:

  • collaborative relationships were more cost effective,
    55% of respondents agree
  • good collaboration minimizes risk, and
    75% of respondents agree
  • learning is faster in a collaborative environment
    70% of respondents conclude that the rate of leaning increases by at least one-and-a-half times

Acquiring the technology that your organization needs to take collaboration with your trading partners to the next level should be a no-brainer. (Especially since the last finding means that any operational metric targeted such as inventory days, total landed cost, cash to cash cycle time can be expected to improve one and a half times as quickly as would be the case without collaborative execution. Thus, any appropriate technology acquisition is going to give you a very quick ROI.)

The only other point of interest was the not-so-surprising result that management by exception it seems is still not part of a “truly collaborative” trading partner relationship for a substantial number of companies. This would indicate that collaboration, even among market leaders, is still not very mature. In a mature relationship, each party trusts the other to do what they do best and only gets involved when a deviation is detected or an idea is devised to improve the process or product. But still, it’s nice to know that both buyers and sellers do not see trust as a barrier to collaborating for mutual gain.