Category Archives: Cost Reduction

#9 e-Auction

Yesterday saw the release of SI’s new sponsored white-paper on the “Top 10 Technologies for Supply Management Savings Today”. Sponsored by BravoSolution, this new whitepaper introduces the top 10 technologies that can help a company realize the goldmine of untapped savings opportunities it is sitting on. Properly employed, these technologies could help an organization tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.

e-Auction technology, which stands for electronic reverse auction technology, is typically the second entry point for a company moving from a paper-based sourcing process to a modern technology-enabled supply management solution and an organization’s second stop to supply management savings.

The savings from e-Auction technology are essentially the same direct savings, from goods and services cost reductions, and indirect savings, from process efficiency and value generated from supply base expansion, found in RFX technology, with the major difference being the speed at which the event can be conducted.

With electronic auctions, once the sourcing manager creates the specifications and sets up the auction, including the weighting and award rules, the process drives itself. The suppliers sign on at the appropriate time and place their bids. When a time-limit or bid floor is reached, the auction ends and the award is made.


The major advantages of e-Auctions are the ability to define precise lot requirements and acceptable bid ranges, which can ensure cost reductions meet a minimal threshold; the ability to define different auction types, which can drive more competitive behaviour in the supply base if properly selected; and the extreme efficiency that can allow a large number of non-strategic or low-value categories to be brought under management.

Properly applied on the right categories at the right time, e-Auctions have been generating savings for over a decade. Back in 2003, in one of the first significant studies on e-Auctions, CAPS Research found that direct cost reductions usually averaged between 10% and 20%, that cycle time reductions could be as much as 40%, and that there could be a “power shift” from strong suppliers to weaker buyers not previously attainable. One company realized 165 Million of savings on 912 Million of spend, a major service provider estimated average savings of 20% on 30 Billion of reverse auctions, and a recent report from the IBM Centre is estimating that the Federal Government could save 8.9 Billion annually through reverse auctions alone.

And this technology is only #9 on the list of the Top 10 Technologies for Supply Management Savings Today. Imagine what could be saved with the top technology, or even the third best technology. Or better yet, instead of imagining, download Top 10 Technologies for Supply Management Savings Today and find out! (Registration is required for this one but the doctor believes it’s worth it!)

Managing Indirect Spend: An In-Depth Review, Part I.1

Late last year, Joe Payne and William (Bill) Dorn of Source One released their first book on Managing Indirect Spend (Amazon) which is a culmination of everything they have learned while doing nothing but Strategic Sourcing since 1992 — before it was cool. Clocking in at 422 pages, this is an incredible resource for anyone who wants to get a handle on indirect spend, which has increased significantly since outsourcing and right-sizing rose to fame in the 1990s.

This book, which should be on the desk of everyone looking to get a handle on indirect spend, is loaded with so much information that there’s no way SI could do it justice in just a post or two — so it’s not going to even try. Just like the book is broken down into four parts, our review, over the next few weeks, will be broken down into four parts — and then into sub-parts where there is just too much to comment in with a single post.

Today we’re going to review the first part of Part One – The Process, and, specifically, the chapters that cover the first three parts of their six part process, namely:

  • Data Collection & Spend Analysis
  • Research
  • The RFx Process

We’re all familiar with the basic process, and if you are a regular reader who has downloaded the free e-book, no registration required, Spend Visibility: An Implementation Guide, then you are very familiar with the data collection and spend analysis process. However, the chapter still makes some good points that need to be reiterated, particularly in regards to building sponsorship and understanding the category. Lack of sponsorship will kill your project faster than a minnow can swim a dipper, and to get it you need the end user’s support as well as senior management. As Joe and Bill state, this will require sitting down with the users and letting them know that they are not being singled out by your spend project, that your project’s success depends on them and is their success as well, and that your project is designed to tie to their objectives (as it should be). In addition, the following is a great checklist of information you will have to review with your users before starting a serious sourcing project on the category:

  • business relationship (with current suppliers)
  • product or service utilization specifics
  • location impact
  • financial implications
  • contractual obligations
  • reports, requirements and actual utilization
  • service requirements and expectations
  • supplier ranking

Joe and Bill also provide some great advice on how to handle the three different types of responses that you will encounter when requesting data from incumbent suppliers — acceptance, avoidance, and pushback — and questions to consider during supplier interviews.

Moving on to the research phase, they provide a breakdown of the eight (8) elements that need to be researched during any sourcing initiative (that you want to be lucky) as well as some great tips for collecting market intelligence through the RFI process. While modern tools, including Source One’s own WhyAbe, make the creation of RFIs drop-dead simple, getting responses and, in particular, the responses you want can be challenging for a variety of reasons. Suppliers might not think you’re serious, might not want to expose what they consider to be sensitive data, or might not be comfortable with the tool. A carefully constructed process has to be put in place, followed, and sometimes augmented by other approaches for the research phase to be truly successful. Joe and Bill lay out their advice, garnered from almost twenty years of experience dedicated to sourcing projects, in detail and offer a blueprint for your success.

Then they jump into the full RFX process, which might consist of an RFP and / or an RFQ/RFB and dive into the typical elements of a good RFP and RFQ as well as the evaluation process that should be followed and the response that should be provided if you want your suppliers to participate in the process again. One point that they make that most other resources miss is the need to include disclosure and liability sections in the RFx document. This is critically important when inviting new, unknown, suppliers to an open event. If these suppliers aren’t awarded the business, they may sue you on the premise that the invitation for bid was in fact an invitation to do business and that the RFx constituted an MOU to be replaced by a future PO or contract once the information was provided. Slimy and shady to say the least, but this has happened. They also discuss the reverse auction process and when it is preferable to an RFX. Finally, they end their discussion of the first half of the sourcing process with a discussion around the need for flexibility and creativity in the sourcing process, a discussion that’s often overlooked. Significant savings are never found by doing the same-old, same-old or just applying one or two sourcing technologies. They are found when the parties come to the table, broaden their horizons, and look for new, creative, and innovative ways to meet organizational needs. And, as Bill and Joe state, suppliers are often much more motivated and engaged when buyers take an alternative approach. So be flexible — and stay tuned. Part I.2 is coming!

The Basics of Information Technology Cost Management

It’s a simple five-step process:

  1. Get a handle on the TCO of IT to the business
    How many units have IT support staff? How much are you paying in maintenance and software licenses each year? How much are you paying in hardware leases and upgrades? What about consultants and outsourced support? The data center(s)? Hosting? And don’t forget the “device propagation” that results every time a new application is added to the data center or a CXO gets a new toy (like an iPad).
  2. Focus on the Cost Drivers
    Energy? Hardware? Software? Projects? Where’s the money going, and why? Treat the IT organization like it is a business and balance the supply and demand.
  3. Be relentless in Valuing IT services
    Examine the cost structure through the eyes of your customers and segregate functions and services into value-add and commodity categories and drive the associated costs accordingly.
  4. Be creative in meeting demand and sourcing work
    Examine the people, process, and technology infrastructure carefully to determine if there is a more cost effective way to deliver the necessary services.
  5. Bring in an expert to re-source the hardware, software, and support you need
    Don’t negotiate multi-million dollar deals on your own if you’re not an expert in IT systems and the current state of the market. If you try, chances are that you’ll overpay by a lot more than 10%!

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.