Category Archives: Cost Reduction

Another Lesson In The Peril of Spreadsheets

A recent article in Supply and Demand Chain Executive on why you should NOT “Let This Happen To You” had some scary lessons on why spreadsheets should be tossed out of your operations management process forever and ever.

  • a high-volume software company unwittingly threw 20 Million annually into the scrap bin because of a hidden, devastating, logical spreadsheet error that systematically triggered over-ordering of seasonal printed materials
  • a financial services firm underestimated support centre demand by over 250 agents, roughly 25 percent of total demand because of formula errors and inappropriate assumptions
  • a national build-out of a digital service network was beset with months of delays and millions of dollars in lost revenue because spreadsheet-based material planning and execution tools were overwhelmed with the size and complexity of the job

And, as the article pointed out, management is usually unaware of the issues until crisis is upon the company. Spreadsheets might “get the job done” when a quick and dirty calculation is needed for an estimate, but calamities incubate when an application is extended to problems that are too large or complex and eventually significant error creeps in that could devastate your business.

This is especially true in Supply Management. As the author notes, the high-volume software company that lost 20 Million annually relied on spreadsheets that not only included forecasting information, but that extended all the way into the Procurement of materials. The authors neglected to include materials already on order as part of supply requirements. As a result, every time the spreadsheet was reviewed, another unnecessary buy was signalled.

And it’s true in Service Management. The financial services firm that underestimated support centre demand used a spreadsheet that assumed demand would stay constant with a major service platform roll-out.

For any calculation that goes beyond an initial estimate, the repeated use, alteration of, and reliance on spreadsheets quickly leads to manual error. And for any calculation that is large (in value) or complex, it isn’t long before a scenario arises where consequences and execution risk become very high — and costly.

So ditch the spreadsheets and put in place proper financial, enterprise planning, data analysis, and supply management tools. The corporate bank account will thank you.

Another Advantage of Design For Recycle: Two Products for the Price of One!

In the early days of SI, a classic post appeared telling you to Design for Recycle. This was because a design that accounted for recycling from day one allowed you to recover costly raw materials, comply with stringent environmental regulations, and attract Generation Y’ers who are, on average, much more concerned than you with the environment, sustainability, and corporate social responsibility.

However, what we didn’t tell you was that a major benefit of designing a product to be recyclable was that, by default, the product ended up being well designed for reuse as it was easy to disassemble, and, as a result, easy to swap out components. This not only simplifies, and the lowers the cost of repairs, but makes it easy to upgrade components to extend product life. And if core components can be upgraded, then, when better components (such as processors, flash drives, and antennas) are available, these can be upgraded and a next generation product can be released 6 to 18 months later. And just like Apple gets a free iPhone 4S as a result of a well designed iPhone 4 (and the millions of dollars in sales that go with it), you too could get a free product X.Y as a result of a well designed product X that is designed to be reused and recycled. Think about it.

Lavante Recovery – A Risk-Free Way to Segue Into SIM

Yesterday, I was the first to get a sneak peak into the live-beta of Lavante’s new Recovery Audit solution that is being built on top of the brand-spanking-new Supplier Information Management solution that they released earlier this year (as showcased in this February post). Given it’s unique foundation, and the decade of recovery audit experience that has been baked into it, it is no surprise that Lavante is finding ten (10) times the savings of an average recovery audit, and up to fifty (50) times for select clients — even though the product is still in Private Beta and full (seamless) integration (with SIM) won’t be available until next year.

The great thing about the solution is that the first thing it does is identify omissions, errors, and inconsistencies in your supplier data. Using phone number, fax, address, web site, e-mail, and TIN checks, the software is able to find duplicate, erroneous, or incomplete records that need attention. Once these are fixed — either through automated import of up-to-date data from it’s network of over 2 Million companies, or from a multi-channel reach-out that seamlessly integrates telephone, fax, and snail-mail reach-out as well as e-mail reach-out — the software automatically applies a suite of rules and checks to find duplicate payments, overpayments, and potentially fraudulent payments that you have not yet identified. And once these are verified as accurate, provided you have a decent agreement/contract in place, you can go after the vendor for credits.

The benefits of good supplier data and multi-channel reach-out cannot be underestimated where recovery audits are concerned. For the latter, they have average reach-out response rates of over 50% (and as high as 80% for some customers), which are eight (8) to ten (10) times the response rates of providers who just do e-mail / web-based reach-outs. With respect to the former, cleaner supplier data makes for more complete transaction data, which not only increases the chance of finding a duplicate, incorrect, or fraudulent transaction — but improves your follow-on spend analysis efforts (and results). As a result of its supplier data cleansing effort, Lavante is typically able to process at least 95% of spend through its recovery audit solution, which maximizes the chances that it will find the majority of your recovery opportunities.

The SaaS solution is quite simple to use — consisting of four main components: the dashboard, claims management, invoice management, and reporting. The claims management section allows you to review each claim found by the system, which includes complete information about the claim — type, reason, organization, supplier, status, supporting documentation, etc, and take appropriate actions, which can include additional review, processing, or reassignment. The invoice section lets you manage your invoices from Lavante for recovery services. If you choose the fixed fee option, you will get one invoice on the agreed upon invoicing cycle for access to the software. If you choose the risk-free contingency model, then you will get an invoice for each valid claim made to a supplier that results in a credit or repayment. The reporting section consists of a suite of audit, cash-flow, claims, invoice, non-compliance, OFAC-SDN, and Vendor reports that give you pretty much any piece of information correlated with any other piece of information any way you want to look at it. The dashboard allows you to see your claim and invoice summary data at a glance, and to select the four most important reports to you — which can be viewed in (multiple) chart form(s) or in tabular form, and exported to csv or pdf. And while it’s a basic solution at this point, the only obvious weakness, given that the one goal of the platform at this point is to find all payments eligible for recovery, is that they do not yet have a custom report builder.

I’m sure they’ll get there. They shared with me their 2012+ roadmap for the solution, and it’s quite impressive. They have a vision to build on the solution to extend it first to a contract compliance solution, then to a fraud prevention solution, and finally to a risk management platform that will also integrate with their supplier management platform which will include compliance management. They understand that, done right, recovery is a one-trick pony (because, if you do it right, you also identify the source problem and fix it) and that the real value is not in recovery, but duplicate, overpayment, and fraud prevention — and monitoring transactions in such a way that they can be used to judge supplier, and supply chain, risk. I expect it will take them a few years to get there, but it will also take an average company one to two years to identify the majority of reasons for duplicate and over-payments and fix their processes, so Lavante should be able to grow in lock-step with their customer base. Regardless, Lavante is a company to watch and a solution to investigate for any Fortune 500/Global 3000 (want-to-be) that has never done a recovery audit. At the very least the included supplier data analysis service will add value. And when your data is in order, you can take your transaction analysis to the next level. And given that good data enables good spend analysis, and that a spend analysis will typically uncover 10% savings opportunities, what have you got to lose?

Recovery Audits – Are They Worth It?

According to one vendor:

AP departments face daily challenges, including fraud, data decay, product returns, and errors — resulting in transactional errors and [lost] credits with suppliers. An ongoing, comprehensive review of your suppliers’ AR records, known as a statement audit, recovers these dollars for your company. If you’re not performing a statement audit, you’re leaving money with your suppliers.

And this is true, but is there enough money being lost to make a recovery audit worth it? Some statistics state that, for an average Fortune 500/Global 3000, a traditional average recovery audit will only uncover 50,000 to 100,000 in vendor credits for every 1,000,000,000. That’s a best case savings of only 0.01%. I can march into an office supply vendor and demand 10% off the top (before I take my business across the street), get it, and probably save you that much from 10 minutes of negotiation. Considering that the average company will spend well over 1,000,000 on office supplies, taking 10% off of that is well over 100,000 dollars, and quicker than a traditional recovery audit (where a team of “analysts” pour through transactions hoping to find duplicates you don’t know about).

However, using technology and analysis, some companies are able to recover an average of 600,000 to 1,000,000 in vendor credits for every 1,000,000,000 in a recovery audit, and even though this is still only 0.1%, that’s enough money to make it worth while if it doesn’t cost you very much. And in some cases, the leaders are able to recover 5,000,000 for every 1,000,000,000, and that’s always worth it no matter how big you are. Especially if you can get a good contingency-based arrangement.

And it’s even better if, in the process, the vendor, using SIM-powered technology, can identify problems with your supplier records that you need to fix to prevent such errors from happening again in the future. So where do you look for such a vendor? Stay tuned!

Want to Beat Commoditization? Follow Dow Corning’s Example and Embrace It!

A recent article over on Chief Executive on “how Dow Corning beat commoditization by embracing it” tells a great story about how the onset of commoditization might actually provide an advantage to your company and your supply chain and how a careful study and segmentation of the market can be productive and profitable.

About ten years ago, when Dow Corning realized that silicone was about to become a commodity as the markets matured, it did a strategic customer segmentation exercise that revealed that not only did its customers exist within four segments, but that there were still opportunities for success in each segment through better service and appropriate strategies. In particular, Dow Corning realized that it could be much more profitable if it could find a better way to serve the “price seeker” segment which knew what products it needed, and how to use them, but also knew that it didn’t need high value services bundled into the price of the product. This segment simply wanted standard silicones at the lowest possible price point.

However, as CFO Don Sheets realized, you can’t win the price seeker segment merely by cutting prices, as that inevitably results in unacceptably, and sometimes dangerously, low margins. The only way to win is to define and implement an appropriate business model specialized to that customer segment that provides value to the customer (low cost) and the business (reasonable margins).

Sometimes merely cutting value added services (that the price seekers don’t want) is enough, but sometimes it isn’t. If the organization was focussed on high-value, chances are the processes don’t support the price points necessary to win the “price seeker” segment as low-cost was never the primary goal, as in Dow Corning’s case. In order to support the target price points that were identified as necessary to win in the space, production and distribution had to be optimized and, in Dow Corning’s case, minimum order quantities and order lead times were required to create the necessary efficiencies in the supply chain to lower production, logistic, and storage costs sufficiently to support a lower price point. This ensured that all prices could be minimized with proper planning. In addition, Dow Corning created the new product line as a web-enabled business to allow the customer to place orders with no human interaction to minimize resource overheads. This allowed for the creation of a low-cost brand that allowed Dow Corning to tackle the price-seeker market, earn back their investment in three (3) months, and drive a majority of business from new customers.