Category Archives: Economics

Procurement Trend 05. Return to Regional and Local Sourcing

Just two very trying anti-trends remain. We’re one post away from fearlessly finishing our formidable burden, but the sour taste in our mouths still remains as we must continue to provide those factually-challenged futurists with counter-examples to the trends of their forerunners who saw this coming a decade ago. (Check the very early SI archives if you don’t believe me. Go ahead. Check. This post will still be here.) We want to abash them for their apathy, but we will leave their hard-earned humiliation for LOLCat, who wants to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these garbage hauling patrons of Quark keep pushing us trends from their flights of fantasy? Besides the fact that some of them obviously spent the best part of last decade hauling garbage, it’s probably because they look around, see the laggard organizations still struggling with the insourcing/outsourcing balance, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are losing hand over fist in their outsourcing arrangements, maybe it’s time to pull them back, especially if

  • energy, and thus transportation, costs are going higher and higher
    and since oil, natural gas, and coal reserves ARE limited, and the dwindling supplies that remain are getting harder to extract, cost have nowhere to go but up, up, and away
  • labour costs are rising in emerging and emergent markets
    and the faster they emerge, the faster labour costs increase
  • nearby markets have low transportation costs and high automation can
    contain labour costs
    since the shorter the distance, the less energy required to cover the distance; plus, intelligent automation decreases the amount of manual labour required to product any product

So what does this mean?

Understand the Total Cost of Outsourcing

Remember, it’s not just landed cost (unit cost and transportation cost), it’s also import/export costs, communication and remote management costs, on-site visits, liability costs, return costs, and other related costs. If many of these costs are rising, then outsourcing is probably not the right idea. If only one or two of these costs are rising then it depends how much, and how fast, and what the alternatives are.

Understand the True Opportunity in Near-sourcing / Insourcing

Near-sourcing will have many of the same costs, but transportation, remote management, and return costs will often be lower. Plus, if you pick/invest in a more advanced plant with newer automation technology, the higher labour costs are probably negated by the lower overhead costs, and the opportunity costs that are often lost waiting for delayed shipments, prototypes to land in your hands for testing, and emergency issue-resolution sessions (across time-zones 8 to 12 hours apart) are often minimized as well. However, a lack of automation can result in significantly higher labour costs, a lack of appropriate trade agreements with respect to the products being purchases can result in higher import or export fees, and energy costs could be higher as well (if renewables don’t enter the equation). The whole cost model has to be evaluated (and compared to the whole cost model associated with outsourcing).

And make a decision based upon true (future) costs

One should never make an insourcing, near-sourcing, or outsourcing decision on today’s costs – make it on expected costs over the next five years. Use the market data that you are collecting for market trend analysis and predictive analytics to figure out what the costs are going to be over the next five years and then choose the optimal production strategy based upon the amortized five-year cost. Consider the hard and soft costs associated with relocating production and/or services, making a change for a very short term gain will not result in any savings being realized. Do the math and make the right choice.

890 Years Ago Today

David I becomes King of Scots. And while one could write a nice treatise about how he was a pious king, a reformer and civilizing agent in a barbarian nation and on the effects of his changes on Scottish cultural development, I’m not going to. (Wikipedia) There are full bodies of work out there you can read if you are interested.

The only reason SI is mentioning his royal coronation 890 years later is because he was the first to bring Scotland into the modern era. Despite the fact that it is England’s northern neighbour, the Scot’s didn’t have their own coinage until David’s reign, even though the Celts (which immigrated from Northern France) were producing coins as early as 80 BC and the Anglo-Saxons, after the departure of the Romans around 450 AD, began to produce their own coinage around 600 AD with the Viking colonization of the north-east of England (that minted coins in York). Charlemagne produced denier in the Kingdom of the Franks around 755 AD, and when Eadgar became king of England in 959, he introduced a silver penny that was used throughout the whole of England. But Scotland didn’t get their own coin for another 170 years!

The modern economy runs on the global banking system, which runs on banknotes, which was a replacement for the copper, silver, and gold coins that defined the monetary system of the time. This was an important first step in Scotland’s economic development, and a reminder of just how young our modern global economy really is when some places, known to be inhabited for millennia, didn’t even have coins a thousand years ago!

But the Scots learned fast. Now they are one of the most fiscally sound countries in Europe and even considering Independence in the fall (in a national referendum on September 18) as they believe they can do better economically on their own than as part of the UK!

Anyone have any thoughts on this?

320 Years Ago The Bank of England Was Established …

It’s establishment is very important as it was the first bank to initiate the permanent issue of banknotes (which were initially offered to raise money to fund the war against France) …

And 200 years ago today, the Netherlands Bank issued it’s first banknote, bringing the Netherlands into the modern age of money de-coupled from the coinage they were originally a substitute for, 48 years before the Federal Government of the United States entered the modern monetary age (and 121 years before the Government of Canada did the same).

I’m sure our good friend Gert van der Heijden, author of Spend Matters Netherlands over in Amsterdam is very pleased about this, because it’s yet another reason why Europe, and Scandinavia in particular, are so far ahead of us in e-Commerce, e-Procurement, and even e-Government — as they are 50 years ahead of us in commerce practices.

For those who are interested, Wikipedia has a good history of the bank note. We all take paper money for granted, but it is only recently that it has become common place around the globe.

Is the Emerging Share Economy Going to Disrupt Your Procurement Practices?

My Purchasing Center recently ran a very interesting article from a Senior Consultant of the Hackett Group on “Considerations for Supply Chain and Procurement in the Share Economy” that did a great job of explaining how the Share Economy is disrupting consumer purchasing patterns, and thus demand. However, in SI’s view, it did not do as great a job when it came time to make the case that it would disrupt daily Procurement operations.

In SI’s view, while the share economy may change the approach to certain categories, it’s not going to change fundamental procurement processes, methodologies, or the best practices that a leading Procurement organization brings to the table. We will elaborate on this, but first let’s review the main points of the My Purchasing Center article.

Noting that the share economy is projected to reach 3.5 Billion this year, with no signs of slowing down, the author of the My Purchasing Center article posits that these trends are going to have a significant, innovative, and potentially disruptive impact on Supply Chain and Procurement.

Zeroing on on services like Lyft and Airbnb where legions of people use their own car or living space as an on-demand taxi-service or rental, the author notes that this reduces the demand for additional cars and short-term rental properties. Similarly, services like zip-car, where people can rent on demand, not only reduce the demand for taxis and limos, but for second vehicles altogether, and thus reduce the total demand for vehicles from a manufacturer. This can effect economies of scale, and increase the cost of each vehicle produced if the demand drop is significant.

Then there is the emergence of 3D printing that is now to the point where even non-engineers can assemble a 3D printer, download some software, and produce their own goods at home. When the cost drops, demand for products that can be just as cheaply printed at home may drop but, more importantly, demand for products that can be printed in bulk just as cheaply as needed on the shop floor could wipe out entire categories for a supplier.

And these are valid observations. Demand is going to change, and shift, and it’s going to have an effect on what an organization can and can’t sell and on what a supplier can and can not profitably produce. No argument there.

But, unless it takes us back to a barter economy, it’s not going to have much of an impact on a good Procurement organization. The first thing a good Procurement organization does when it starts a sourcing event for a category is analyze the category in depth to determine the demand for the product or service, the criticality of the product or service, the strategic nature of supply relationships in the delivery of the product or service, etc. to determine what supply strategy is the most relevant, how the sourcing event should be conducted, what technology should be brought to bear, etc. If demand has dropped 50% in a category since it was last sourced and the economies of scale have diminished, then sourcing is going to shift from a lowest TCO approach to a strategic relationship where it can work with the supplier to take cost out of the production or delivery process or, if necessary, innovative a new design that will allow it to use lower cost materials and production / delivery processes. With or without a share economy, the mandate, and function, of Procurement is the same — source each category in the manner which generates the most value to the organization and procure each part or service against the identified strategy.

Do you think SI is missing something? If so, leave a comment.

Will Supply Management Save the US Economy? Part III

It’s hard to say, but Supply Management could be a contender. Why?

Supply chains are more global, more interconnected, more complicated, and more prone to significant disruption than ever before — and the successful management thereof is more difficult than ever before. It requires a jack-of-all-trades that is also a master of one (trade called Supply Management). Only the best of the best of the best with the right education, experience, and EQ can manage these beasts of our own creation that are more fearsome, and ferocious (when a disruption occurs) than the great hydra of myth. And most of these people are in the US — which started the outsourcing craze in the 80s, learned the hard way when they skipped over the frying pan and into the fire, and then, as they learned the errors of their hasty ways, started institutionalizing knowledge and building best practices to help them cope, and, in the long term, succeed.

In order for the US to remain competitive, now that Europe is getting into the global supply chain game in a big way and taking advantage of their closer proximity to Asia, the current outsourcing destination of choice, and Africa, the future outsourcing destination of choice, the US is going to have to step up its supply chain game and produce more supply management leaders. This is going to require more thought leaders, more educators, and more institutionalization of knowledge and best practices. In other words, the US has to create the ability to not only produce supply chain leaders on demand, but produce world-class supply chain leaders.

Once the US has the ability to create the best supply chain leaders on a regular, and repeatable, basis, it doesn’t have to stop when the US’ needs for leaders are fulfilled. It can keep producing leaders because the entire world needs supply chain leaders, and if other countries can’t produce supply chain leaders of the same caliber (and, right now, many can’t), they will need (consulting) leadership and the US could produce the leaders to fill that gap. This has the potential to create millions (upon millions) of consulting jobs. There are over 100 Million businesses in the world, and over 10M of these are mid-sized businesses which, if they are not going global today, are likely to be going global tomorrow, and they will need help at all levels of the supply chain. That’s a lot of consulting that needs to come from somewhere. The US could produce those consultants and establish an industry around them.

And this is an industry the US could own. The continual improvement in automation technology essentially ensures that manufacturing will continue to move to lower cost locales and continual improvement in global telecommunications infrastructure essentially guarantees that customer service, data processing, and even programming will continue to move to lower cost locales as well. And even though Peter Drucker invented modern management consulting, Europe has caught up and the US really has no advantage here. In the knowledge-driven future, global leadership will be reserved to those disciplines where a country has the most advanced knowledge, and this is one area where the US has, and can continue to have, leadership.

So will Supply Management save the US Economy? I don’t think anyone can say for sure, but if the right focus was applied, in addition to saving companies hit hard by the economy by taking cost out of (and putting quality into) their supply chains, Supply Management has the potential to do the same for the economy as a whole. But will anyone realize this (before it’s too late)?