Category Archives: Finance

Financial Business Risk Prioritizes Supply Chain Vulnerabilities …

… but it does not identify those vulnerabilities, although it can tell you where to start looking. So while an article in the SCMR last year provided a good overview on how to evaluate, and quantify, supplier risk, the title was misleading when it said they were calculating business risk to identify supply chain vulnerabilities.

The article, which described an approach by the authors to find a way to improve the evaluation of risk impact on a business, culminated in four main findings. The approach, which looked at the total financial impact a supplier failure would have, yielded two findings that we’ve known for over a decade, ever since Resilinc pioneered the approach of assessing the financial risk associated with a supplier failure (based on mapping where all of their parts are used and which of those are single source)

  • procurement spend with a supplier is NOT correlated with the financial risk of a supplier
  • part standardization can increase business risk impact

As well as two insights that are rather new:

  • procurement spend is not correlated with the revenue of the company (the Resilinc model could have shown this, but they did not focus on this or collect those metrics last time SI was made aware of their methodology)
  • true high-risk impact suppliers are a substantially smaller amount of spend than an organization might think; in the authors’ study, they represented only 28% of total spend (whereas most companies will highlight the high spend suppliers as high risk and identify the suppliers that represent almost 3 quarters of spend, or 73% in this study)

The reason for this is that they linked all of the organization’s data sources that contained information related to the BoM for each SKU, the revenue for each SKU, and the suppliers for each BOM. By creating a network of connections between components, products, and suppliers, and identifying single source parts, the link between the criticality of a supplier and the revenue became clear. Consider the supplier who supplies that custom control chip for the fuel injection management, cruise control, or even for the monitoring of the tire pressure. If they were to fail, the absence of a single, $10, custom control chip can bring down a multi-million dollar production line, and close down an entire production plant, as the recent semiconductor shortage did to many plants during COVID. Given that these were being put into $10,000 to $100,000 cars, these suppliers would never have blipped on a spend-based risk assessment. And this is just one example.

But it is an example that demonstrates the blind spots companies have with respect to small and specialized suppliers that aren’t in the top 80% of spend but yet supply sole-sourced and/or custom parts or products. This means that when doing a risk assessment, it’s not just risky suppliers or risky supply chains that need to be assessed, it’s any supplier that supplies something that isn’t easily replaced by another source should something happen to the current supplier. The risk could be low that they will fail, and lower still that you couldn’t quickly modify a design to use an alternative, but you don’t know until you assess. And that assessment must be revenue and criticality based, not spend based. Spending $100M with a steel supplier to acquire the raw material for a frame assembly makes the supplier strategic, but doesn’t make using that supplier super risky when all their competitors offer the same grades of steel. But if you need a custom chip for that car, power transformer, etc., and you currently only have one supplier to supply it, then that supplier, no matter how stable and how low-risk its profile looks, is a risk even if it only gets one hundredth of the spend. And you need to determine if it has any vulnerabilities and, if so, monitor them so you won’t be surprised by a sudden failure.

Calculum Charts your Course to Commerce Cultivation and Cash Cutting!

Calculum is a very interesting solution offering — it’s a working capital analytics solution meant to be the missing link between Finance and Procurement that just doesn’t exist today. Built to help their customers (which are mainly Global 3000 companies) to optimize their working capital across Procurement by optimizing payments and payment terms while taking weighted average cost of capital into effect, it offers a broader, and deeper, picture of cash needs and options than most platforms today.

Moreover, it goes well beyond the typical Procurement approach of simply recommending paying every supplier on the last possible day you are legally allowed to (based on either the contract or the country regulations, which they track for you) without penalty, and possibly the last possible day with penalty (if the contract is for less than the legally allowed maximum payment term) if the organization’s cost of capital is known to be lower than the penalty.

More specifically, it allows a company to understand the impact to working capital from

  • paying on a different (later) date
  • paying early (on a discount schedule)
  • paying up front (to reduce the supplier’s cost of working capital)
  • borrowing / using supply chain finance options to pay up front / early
  • using (virtual) cards

while taking into account its

  • cash conversion cycle (C2C)
  • days sales outstanding (DSO)
  • days payable outstanding (DPO)

and provide a company with true working capital and financing option optimization across Procurement, Finance, and Treasury and, in doing so, provide an average increase in free cash flow by 10% for every dollar analyzed.

Calculum does this by being possibly the only working capital optimization platform that is built on a solid spend analytics platform with its interface customized for working capital optimization, instead of category spend optimization.

Calculum starts by uploading your suppliers, contracts, and AP (invoice and payment) data, matching the data, helping you cleanse it until they have at least 90% 3-way match across your spend data (using their large, internal, supplier database of millions of suppliers ), from which they can determine immediate working capital optimization opportunities, prioritize suppliers for the realization of those opportunities, and distribute the opportunities across their 9 boxes for term extension and financing opportunities. (And you can see the exact degree of match, as well as the reasons for exception, in the match dashboards that present statistics on the data received, match rate, data quality, exclusions, and reasons for — and give you the data you, or Calculum, needs to improve the match rate)

Let’s start with that last sentence. Once the data is matched, the platform’s built in analytics will automatically identify:

  • all of your term extension opportunities across the supply base (taking into account any country legislations and noting existing terms where they are defined) organized into 9 cash flow buckets defined by impact vs. probability of success (which can be computed based upon historical supplier decisions, tracked in their centralized supplier database with anonymized data and past decisions, and similar supplier responses)
  • all of your financing opportunities from early payment discounts that are not being realized and/or negotiable discounts for early payments based on your weighted average cost of capital vs. that of your supplier also organized into 9 cash flow buckets based upon impact vs. probability of success (calculated in a similar manner)

Once the data is loaded, matched, and verified, a user can move from matching to optimizing gtheir working capital in the Opportunity dashboards and tabs. In this set of tabs and dashboards, you can:

  • see an overview that summarizes current payment terms (by contractual, opportunity, and excepted averages), cashflow opportunity, economic profit opportunity, affected entities, opportunity by category, and opportunity by program area (spend volume, supplier count, cash flow, and economic profit)
  • undertake your supplier prioritization efforts based upon your assessment of the easiest realized significant opportunities (by getting them to agree to different terms for faster payment or larger/future orders etc.)
  • review the 9 boxes financing built during the match
  • create your waterfall plan for attacking as much opportunity as possible

Moreover, because Calculum built their working capital optimization platform on a real spend analysis platform (with real cube support), which allows them to optimize payments and payment terms on multiple factors optimized against over 3 Trillion in analyzed spend, you can filter on any (set of) dimension(s) you like down to a small group of transactions.

Once you have finalized the opportunities and your waterfall/wave plan, you can move into the manage dashboards that allow you to

  • monitor your progress in the overview dashboard that tracks progress between current and target average payment terms, cashflow improvement progress, analyzed vs. planned vs contacted (effort begun/underway) vs. agreed (which could result in an unchanged term, as the opportunity should be closed either way after an [attempted] negotiation)
  • track your negotiations and reach out

And, of course, you can drill into any supplier, parent, or spend line of interest at any time because it’s a real spend analysis platform and see all of the relevant data at any level of the hierarchy that you like.

In addition, you can get a snapshot of working capital related information (spend, spend lines, (average) contracted terms, (average) payment terms, opportunity, etc. by supplier at any time simply by entering the suppliers dashboard and drilling into the supplier (or parent) of interest. The primary view will also tell you where the supplier is in the analyzed vs. planned vs contacted vs. agreed working capital optimization workflow supported by the platform. Drilling into a supplier will bring up basic corporate details, the corporate tree, any available ratings and metrics, and a payment terms vs. pricing analysis where you can calculate impacts from changes in payment terms, financing rates, your rates vs. the supplier’s rates, etc. to determine the optimal time to pay a supplier. The platform will then calculate the cost impacts of any potential/suggested change to both you and the supplier so you can make an informed decision (because sometimes an early payment doesn’t save you anything and sometimes extending a payment term costs you dearly in the long run). This allows you to propose win-win (or at least win-neutral) options that the supplier really shouldn’t be rejecting!

In addition, the platform uses AI to analyze all of the data they have on the supplier against standard strategies and built in models to recommend a detailed strategy for each supplier in the opportunity section so that you have deep guidance on how to approach a negotiation to alter the payment terms.

Moreover, Calculum is more than just a platform, it’s also a partially managed service where they work with you to ensure your data is properly uploaded and matched, the opportunities appropriately identified, the initial plan realistic and realizable, and execution effective, especially during the first few months where results and success is critical. They’re also there to support you on an ongoing basis and, if necessary, handle the refreshes / updates for you.

It’s a very unique offering and one that complements many Source-to-Pay or Procure-to-Pay platforms nicely for mid-market-plus organizations that need to maximize the value of their cash in these difficult times. It’s certainly a platform to check out if working capital optimization is front-and-center on the CFO’s mind.

We like what it’s doing and how it’s doing it and believe it is very valuable to a large segment of the mid-market. Upon a first review, there were no obvious holes or situations where we would say “the platform really should do this“, and the only point of sorrow we walked away with is that it’s not being sold by Calculon 2.0 (but then again, they are 988 years too early).

Need Some New Equipment? Then You Better Get that Financing APPROVEd!

Ten years ago, SI was one of the first sites to cover KWIPPED, which was one of the first, and now likely the oldest (and biggest), marketplace for equipment rental procurement for all your equipment rental needs. Launched to help businesses with idle equipment and equipment rental agencies connect with businesses that needed to rent equipment for the short to long term, it served a niche in complex and project procurement that the major procurement platforms weren’t (and still aren’t) solving.

It works well, and worked well since day one as it grew quite fast, and while it met a lot of the market needs, it didn’t solve all of the market problems that were out there in equipment procurement for precise/complex projects and one-time acquisitions. Namely:

  • Some buyers wanted to rent to own, but suppliers weren’t (or couldn’t afford to be) offering that
  • Some buyers wanted to lease, or lease to own, for long periods of time, but needed up front financing (which suppliers couldn’t afford)
  • Some suppliers wanted to help buyers get financing, but they could only recommend a few lenders, who were often:
    • too strict in their lending criteria
    • too costly with their rates
    • too slow, and buyers walked away
  • Some suppliers didn’t like the loss of visibility into, or control, of the sales process with current lending processes (send the buyer away to a third-party lender and hope she comes back)
  • Many lenders didn’t like random referrals they were unlikely to ever approve (which wasted their time), or the spray and pray tactics savvier buyers who knew how to find options would use (which wasted their time)

In other words, buyers and suppliers wanted financing options so they could lease to own (or even buy outright), but neither of them liked the current application and approval process, and lenders wanted an easier, more efficient way, to get requests relevant to their lending business, so they could waste less time in approvals and more on hitting their lending targets (because they need to lend to make money).

Being techies, the founders of KWIPPED, who started off by making introductions to potential lenders on behalf of suppliers they knew well and buyers who asked, realized there had to be a better way to solve this problem, because forcing buyers to go offline and deal with a lender through old-school fax and email just wasn’t a good experience for anyone. They realized that there should be a platform like Lendgo (that could obtain, and compare, personal mortgages and refinancing options side-by-side), but for business equipment financing and leasing, and, more importantly, one that meets the need of all three parties, not just the buyer or lender.

So that’s what they set out to do, and they do it through the APPROVE marketplace (which can be accessed through the KWIPPED platform, the seller’s website, or even a third-party marketplace through a plug-in).
In KWIPPED, or a supported supplier marketplace, when a buyer brings up a listing, they will see the buy-it-now price, the rental price, and the estimated financing price (per month) based on the equipment type and a predictive model based on a database of over 75,000 financing applications and 3+ responses to each (which allows them to predict, with high accuracy, the estimated financing for that item for a buyer with average or better credit rating).

To start a financing application, it’s a 60-second process for the buyer who just needs to fill in some basic details to kick the process off. At this point, the request will be routed to a supplier’s financing (assistance) department if they have one, or the APPROVE financing team who will contact the buyer for any specific information required to make a lending application, get clarity on their needs, augment the application with the right data in the right language to optimize clarity and success with the lenders, and then, when the application is ready, kick off the automatic application process in the system.

Unlike many of these marketplace financing/mortgage/insurance platforms, the APPROVE platform is not a spray-and-pray platform or one that relies on buyer expertise to build a short list of potential lenders to send the application to. Once all the information has been collected, they use a predictive (machine learning) model that has been trained on this data set of over 75,000 financing requests, over 300,0000 quotes, and third-party risk and financial data on the buyers and sellers to predict which vendors will approve the financing and what the rates will be, and then send it to the top 3 vendors with the lowest predicted rates and a high chance of approval. If one or more of these vendors denies, it will continue down the list of potential lenders (who are predicted to charge higher rates and/or have a lower chance of approval) until it gets 3 quotes for the buyer. And, if the financier on the APPROVE or seller team happens to know that a particular lender is more or less likely to approve a specific request based on experience, they can override the rankings and issue the request direct to the lender (but generally the platform works quite well and it’s best to let it work its predictive model).

This is a very important differentiation. You don’t want to send a financing request to just any lender because:

  • some very risk averse lenders will only approve the top top tier of buyers (the cream of the crop that could probably afford to buy outright), and you’re just wasting your time
  • some less risk averse lenders will lend to anyone, who want to pay exorbitant interest rates that are 2X to 3X prime (and should only be a last resort)
  • some lenders specialize in certain industries and equipment types, and don’t want to lend outside their domain of expertise
  • etc.

This means if you don’t target the financing applications properly, you are going to get a lot of lender rejections or a lot of bad offers that the buyer won’t accept, leading to a lot of wasted time on all parties (and platform mistrust). Through laser focussed targeting, buyers know they have a real shot of getting financing at a rate close to the predicted value, sellers know that buyers are serious if they follow through with the application, and lenders know that, if they want the business, they have (at least) a 33% chance of getting it. That gives these lenders better odds than banks offering a mortgage! Moreover, since APPROVE targets the quote requests, the odds that they will be willing to quote the application is 80% or more, compared to 50% at best for a random application. This means that APPROVE is at least 60% better for lenders than random seller referrals, making it worth the lender’s time to process buyer applications from the APPROVE platform much more quickly.

Moreover, unlike most of the market “lending” platforms out there, all parties have complete visibility into where the application is at all times.

The buyer can see when the financing request has been formally issued to the lenders, when a lender has returned a quote or rejected it, and then the 3 quotes side by side once 3 are received (and then select one to accept through the platform).

The lender has a view into the status of all of its open requests, as well as its request history, and all communications between it and either the APPROVE or supplier financing team (to collect any additional data it decides that it needs to issue a quote).

The lessor/seller can see where the process is at any time for each buyer that submitted a financing request, any communications that went back and forth between the APPROVE financing team and the lender (on the lessor/seller’s behalf), what quotes were returned, and when a buyer has accepted a quote and then begin the process on their end of completing the transaction without delay.

The APPROVE platform, especially when accessed through KWIPPED, a supplier web site, or third-party marketplace, makes the entire process of finding the right equipment, engaging with the supplier, getting the right financing, and closing the deal smooth, efficient, and relatively painless for all parties.

So while, like KWIPPED, this is NOT a typical sourcing or procurement platform that SI would normally cover, it is a very important platform nonetheless as most of your direct, indirect, and complex services sourcing platforms don’t enable the identification of rent-to-own or lease-to-own options when you need to temporarily (or permanently) acquire new equipment for a new construction, commissioning project, factory, or lab, and definitely don’t help you with financing when you can’t afford to, or don’t want to (because you have other, better, uses for your working capital now), pay for the equipment up-front. Like KWIPPED, APPROVE fills a very specific niche that is overlooked until it is desperately needed, and one that any organization that needs to rent or buy equipment, that just can’t be sourced or procured through normal S2P/P2P platforms, should know about.

M&A Mania is Coming Again … but will it be the same as last time?

the doctor agrees with THE PROPHET that M&A in Procurement, Supply Chain and Finance Tech is Back On For Q4 and 2025, because M&A Mania is part and parcel with the The Marketplace Madness that the doctor told you is coming back in May. The only question is, will this M&A cycle look like the last few during Covid (when every investment firm had to have an online collaboration platform, since they couldn’t do business in person, and an online e-Payment FinTech solution, since they still needed to make, and most importantly receive, payments) and in the late 2010s when companies were getting scooped up left, right, and centre. It was kind of like that first year in Chemistry where you were told to look to your left, look to your right, and look in the mirror and realize that only one of you would survive the end of the course (except the odds had worsened and there was only a 1/6 chance that any of you would be left standing at the end of the M&A cycle and less than a 1/9 chance that more than one of you would be left standing).

But first, let’s review THE PROPHET‘s reasons why:

Reduced interest rate climate coming
Not necessarily in your country, but in the US and a few other major investment markets, and for global funds, that’s enough.
Valuations back up (including a recent one)
the doctor is seeing a bit of this beyond just over-hyped fake-take and (now failing daily) Gen-AI, which indicates a return to value for real solution capability that solves real problems, and not just glam UX or tech buzzwords, could soon be coming.
Dry powder is the size of an ammo depot
And this is a rather conservative estimate. Broaden your definition of our Source-to-Pay space, and it could go well beyond the 666 providers in the mega-map.
Constrained target/asset pool to pursue
Too many providers not focussed on Gen-AI bullcr@p were not (well) funded and in need of funding to grow and too many providers who raised too much on Gen-AI bullcr@p blew too much on failed dev and marketing and need someone to infuse them with fresh funding while taking in the reigns and refocussing them on core problems.
No clear leader in many markets
Even if you constrain by target enterprise size, vertical groupings, and module, you’re usually looking at over a dozen vendors. Too many. By core module alone, you’re usually looking at over eighty (80) potential providers.
Counter-cyclical sector defensibility as a hedge
Most definitely. the doctor has always said the best time to develop/expand is on the verge of a coming financial or supply chain crisis, and it’s even better if it corresponds with the end of a hype-cycle (when everyone realizes that grandiose claims are just that, claims, and usually not realized and it’s time to return to the next generation of tried and true technology).
Times of increasing global uncertainty favours supply chain, supply and supplier risk management
Yes, and this will be constant for years. The outsourcing crisis the doctor and a handful of others have been predicting for over a decade (which is why he was telling you to near-source and home-source in the late 2000s) materialized during COVID, anti-globalization is at a high not seen in the remembered lifetime of most of the global population (and increasing by the day), we likely haven’t been this close to World War III since the cuban missile crisis of 1962 (since the Soviet radar malfunction of 1983 was caught by an alert Soviet air defence forces officer) putting global political tensions at a near all time high since World War II, ever increasing natural disasters and supply shortages are escalating costs at levels of inflation not seen since the 1970s, and in some markets, since the late 1920s (and the Depression era), and it’s just doom and gloom all around. Only our space has the tech to combat this.
Corporate spend flowing into tech, not new jobs
This is unfortunately true since

  • most executives don’t realize that tech only increases productivity and success in the hands of a human, it doesn’t replace them (since Aritificial Idiocy can’t even replace real idiocy, how can you expect it to replace Human Intelligence [HI!])
  • big companies don’t like high fixed costs, and the see people has the highest fixed cost
  • the dream of the new robber baron billionaires is to replace people with machines, which they think will help them realize their vision of constantly increasing profits from constantly increasing revenue (from a workforce that never needs to take a break) at a constantly declining cost to serve (not possible, but that’s their dream)
Nearly all big tech firms (ERP, business applications and stack) aside from SAP have not made any material moves yet — and will need to at some point
You can’t wait for a lumbering giant … by the time they buy someone, it’s ready for sunset. Remember IBM and Emptoris? A sad end to the APE circus! That means that the time to strike as an investor is before they awake!

Add add the following:

  • money has been idling in these funds from lack of investment over the last couple of years (as they got antsy last year with the predicted recession and the SVB failure and the fallout of both), and their investors aren’t happy
  • many of the more progressive funds have realized that fintech is useless if there’s no money moving through it, which means you have to look for broader business solutions that can assure the flow of money as well as information
  • companies are starting to realize that ridiculous 10X, 15X, 20X valuations are a thing of the past (or at least until we get a whole new generation of freshly minted investors who didn’t bother to study their history, like the new generation of founders that didn’t study theirs) and that if you can get a solid 5X to 7X valuation (which is the most a company can expect to realize at an aggressive 40% annual growth rate, which is the most they can hope to realistically support) for tech, that’s great, and this makes acquisitions a lot more attractive than during the last cycle when you’d have to bid 10X on something that might not scale as an investor just to get invited to the table

The M&A market is returning. But there will be some differences this time. The last two times it was valuation run up until the money ran dry or there were no companies left that were worth it. This time will be more reminiscent of the first M&A Mania to hit our space in the late 2000s and it will come with a little kiss, like this:

1. Valuations will be more realistic.

As simply stated, 10X, 15X, 20X growth doesn’t happen in five years for anything but a Unicorn, and even then it’s rare, and investors aren’t going to pay this any more. That being said, they will invest for value and firms who focussed on building real solutions, not slick UX with no substance, will be valuated quite well (at first).

2. The cycle will have 3 parts.

2A. Existing Growth Opportunities

Look for PE firms to buy suites or modules that can be sold and grown stand-alone or as complementary solutions to offerings in their stable. The market for these solutions could mature quickly as the Gen-AI and intake hype cycles crash and the global situation destabilizes and risk-focussed Sourcing and Procurement become paramount. This will be done at fair to very good valuations, depending on the offering and the financial situation of the firm being acquired … those that can wait and play the field will get better valuations.

2B. Fill the Gaps

As new competitors enter the scene, existing providers with aging tech are going to want to counter them and will start buying up point-plays to fill the gaps. This will take two forms.

  1. stable, stand-alone players who can survive without investment will wait for the right offer, get a very good to great valuation, and survive relatively unscathed in personnel and offering (and will continue to be available standalone for some time)
  2. cash-crunched desperate players who won’t survive long without a cash infusion will be bought in a fire sale, folded in quickly, and only key personnel will remain

2C. Liquidation Opportunities

Everyone loves a steal, err, deal. Investors included. As companies start to run out of money left, right and centre because they were underfunded (and struggled to compete with the overfunded overhyped companies) or overfunded and burned money like it grew on Central American fruit trees that produce two healthy crops a year, investors and buyers will be looking for companies with pieces of tech they can use to enhance their offering for pennies on the dollar. These companies will be broken up across talent and technology, with the acquirer keeping only what they want.

Follow the Money — To Find the Spigots that can Turn it Off!

A recent CPO Crunch article over on Procurement Leaders said to Follow the Money as a focus on profit contribution can provide a starting point for improving supply chain transparency.

The article states that having knowledge of our suppliers is one thing, but it’s quite another to have a good understanding of who are suppliers’ suppliers are … not to mention those even further beyond and in a complex, risk-riddled world, such visibility is crucial and can bring meaningful competitive advantage.

In other words, following the money can increase profitability by allowing you to optimize the flow. Which is true, but only half the picture.

The other half is how the flow can be diverted or stopped. Two important things to remember about money flows. First, if these money flows present an opportunity for you, they present an opportunity for others. Not just outright theft of money (or product), but skimming, fraudulent billings/overpayments/handling fees (or your goods don’t move), and even fraudulent good substitution (with knockoffs). Secondly, if any input to any of these flows stops (beyond your visibility), the entire flow stops. And these flows could stop 6 levels down at the source.

For example, let’s say you are in medical device manufacturing or microwave-based manufacturing. Then you need thulium, which is one of the rarest rare earth minerals in the world. If a mine closes, even temporarily, and that mine is the only source of supply into your raw material or component supplier (that produces your enclosed radiation source or manufacturing ferrites), what do you think is going to happen? Production will stop, and your inventory will disappear. Or if you need a custom chip for the control system in your high end electric car, and the one plant currently capable of producing it experiences a fire. (This HAS happened, and chip shortages have been responsible for MULTIPLE shortages in MULTIPLE automotive lines. Just Google it.)

If your only production is in a country with geopolitical instability or deteriorating relations with your country, and borders (temporarily) close, what happens? And so on. If you don’t know the myriad of ways the spigots can be turned off, it doesn’t matter how well you know, or optimize, the money flow. These days, it’s all about risk management, visibility, and quick reaction if a spigot gets turned off to get it reopened again.