Category Archives: Finance

820K for a Las Vegas Conference? Amateurs! Just Ask The UK Public Sector.

I’ve been watching the headlines on Spend Matters and Spend Matters UK the last few weeks where they have been harping on the 820K GSA Conference in Las Vegas (and the fact that the GSA cited their maximum budget in advance with no intention of negotiating lower rates) and the lack of spending ethics in an organization charged with helping the Government save money. While this is an example of “excessive and wasteful” Procurement practice that is likely in violation of the policies of just about any Public Sector agency, it’s more of a personnel issue (with a few bad apples who like to misuse funds) than a Procurement issue.

This story, which broke in early, should be dwarfed by a much more important story that broke around the same time, that dealt with an amount 2,800 times as large. And that is, as first reported on SupplyManagement.com (to the best of the doctor‘s knowledge), the result of the 2012 Annual Fraud Indicator, as published by the National Fraud Authority.

According to the report, Procurement fraud, which made up the largest portion of the total loss, cost central government £1.4 Billion and local government £890 Million as a result of false and ‘double invoicing’, price fixing, altering payment details, and giving kickbacks to determine contract awards. Note that the first and last instances of fraud can only occur when someone on the Procurement team is taking part in the fraud. (And don’t tell me the buyer didn’t double invoice. While true, if he didn’t catch it, he’s guilty. It doesn’t take much work to check an invoice, and if you acquire a good P2P system, invoices are checked automatically against invoices in the system, rejected if obviously duplicate [same invoice #, etc.] and flagged if potentially duplicate [similar details, amounts, etc.].) If a large number of false or double-invoices slip through, then someone on the team is letting them. (Unless they are really, really stupid. But, hopefully, by now such people would have been eliminated from such a significant role given the focus on Procurement in the last decade.)

Think about that for a moment. £2.3 Billion or $3.7 Billion U.S. That’s an amount greater than the economy of at least 30 countries (Tuvalu, Kiribati, Sao Tome, Tonga, Dominica, Comoros, Samoa, Saint Vincent, Saint Kitts and Nevis, Vanuatu, Grenada, Solomon Islands, Guinea-Bissau, Gambia, Seychelles, Liberia, Antigua and Barbuda, Saint Lucia, Djibouti, Belize, Bhutan, Cape Verde, Maldives, Central African Republic, Sierra Leone, Burundi, Lesotho, Guyana, Eritrea, Fiji, Togo, and Suriname)! Gone. In the crapper. Down the drain. From fraud! So, Martha Johnson may have had her fun, while single-handedly propping up the economy of Las Vegas for a few days while doing so, but this wasteful spending (on real goods and services, though very heavily inflated in cost) was only a drop in the bucket compared to the money lost in public sector fraud every year.

The message — if you are a public sector organization, get an audit and do something about the fraud. If you don’t know where to start, get help. There are consultancies that specialize in this. Katzscan is one example.

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.

Procurement Game Plan: A Review Part III.3

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. And even more recently, SI began it’s detailed review, in three parts, of this new Procurement Guide. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, supplier relationship management, and success reporting. This post, which is the beginning of the end of our review, dives into techniques for improving Procurement performance and a few specialized areas of Procurement, as covered in the second last chapter of the text.

The authors define four main technologies for improving performance:

  • Procurement Outsourcing
    which is the shifting of some procurement tasks to an external organization
  • Group Purchasing Organizations
    are entities that are responsible for sourcing and managing aggregated contracts on behalf of a discrete group of companies
  • Procurement Cards (P-Cards)
    that allow organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses
  • Procurement Technology
    that includes e-Procurement and e-Sourcing and allows a buyer to take it to the next level

Since Procurement Outsourcing will likely be restricted to tactical functions if your goal is to create a first-rate strategic Procurement Organization, since GPOs primarily offer advantages only on categories where you just don’t have the volume or the manpower, and since proper coverage of the technologies you should be familiar with and using on a daily basis is a book in and of itself, we’re going to restrict our review of performance enhancing technologies to P-Cards.

Procurement Cards are a tool that can be adopted to reduce tactical activities as they negate the need for POs and simplify payment, which can be made by the buyer placing the order. If three-way match is used (which is the matching of a Purchase Order to an Invoice to a Receiving Record), it can reduce administrative costs as it negates the need for a separate invoice review and payment by accounts payable. Of course, on the other side of the coin, a P-Card can also increase the potential for fraud.

However, as the authors note, implementing P-Cards is not as simple as calling up your local merchant account provider. Due to the ease with which a user can pay for goods not received, overpay, or open the company up to fraud (by forgetting their card at their favourite restaurant), a number of decisions need to be made before the first card is issued. As per the text, some of these decisions include:

  • should there be one spending limit for all holders, spending limit by categories, or individualized limits by buyer?
  • are there limits by transaction, day, or month?
  • are any categories restricted? exempt?
  • who is eligible for a P-Card and who is not?
  • is the P-Card limited to purchases from approved suppliers?
  • what transaction information and reporting capabilities do you require?
  • which provider(s) can meet these requirements?

And these decisions need to be made in context of the advantages and disadvantages P-Cards can provide, which include:

Advantages

  • reduced cycle times which free up your staff to do strategic, instead of tactical, work
  • faster supplier payments which can reduce a supplier’s cost of capital if they have to borrow less (and, in turn, the cost they pass on to you)
  • extended payment terms (which do not impact your supplier as you owe the P-Card provider, not the supplier)
  • less maverick buying (if P-Cards are made mandatory for certain purchases and controls that restrict payment amounts and vendors are put in place)
  • better transaction data for your spend analysis
Disadvantages

  • increased chance of theft/fraud (as it’s just another credit card)
  • longer reconciliation time (if one payment is made for multiple invoices)
  • less budget visibility (as they track transactions, not budget)
  • another system to reconcile (if they are not made mandatory for certain classes of payments)
  • move maverick buying if controls are not well defined (as Homer can now order anything he wants from Mighty Office Express Supplies [MOES] if MOES is an approved vendor with no limit)

Implemented effectively, P-Cards can be a great tool. Implemented poorly, they can be your worst nightmare.

After a whirlwind tour of the technologies employed by leading Procurement organizations, which includes e-Procurement, e-Sourcing, and (Decision) Optimization (explained by the doctor in the Inefficiency Eliminator wiki-paper and the two-part Next Level Purchasing Podcast on Supply Chain Optimization [Part I and Part II, with transcript]), the book moves into a discussion of specialized areas of Procurement where special teams are important.

These areas include Global Sourcing, Procurement Outsourcing Provider (POP) and Global Purchasing Organization (GPO) management, services procurement, and inventory management. Since a discussion of each of these topics is a post in itself, and the discussion was quite dense, we’re just going to focus on a key element of success discussed in the penultimate chapter that many books miss — Project Management. As the authors note:

As organizations have grown globally, Procurement is called upon to unify everyone with a common buying strategy. This requires that a leader assemble a team and coordinate the efforts of subordinate Procurement staff, business unit representatives, and management. There are limited resources, goals, and timelines. Does this sound like the project management discipline? You bet it does!

Project management is an essential element of successful Procurement and every Procurement professional needs to be educated in Project Management methodology (which is why NLP has a course on Professional Purchasing Project Management). This section of the chapter discusses the project charter and its importance, project plans for simple projects, project plans for highly complex projects, and risk analysis — a key part of every project plan. This is a section of the text that everyone should read carefully — twice!

At this point, the reader should have a strong understanding of the basic knowledge required for Procurement success, be aware of her weaknesses, and have a plan to address them (such as through additional [online] training, certification, or mentoring). At this point she is ready to begin her career in the Procurement workplace and become a perennial all-star, which is the subject of the final chapter of the book and will be the subject of our final post.

To be concluded!

Will Your Supply Chain Avoid the 88 Million Dollar Fine?

Last year, JP Morgan had to pay $88.3 Million in fines for breaking U.S. embargo laws and trade sanctions, including Global Terrorism Sanctions Regulations and Weapons of Mass Destruction Proliferators Sanctions, in three incidents between 2005 and 2011 that involved Cuba, Iran and Sudan, as reported on AllGov. That’s a huge penalty that resulted from simply making loans and wire transfers. And in 2010, Maersk had to pay a $3.1 Million fine for using ships registered in the U.S. to carry commercial cargo to Sudan and Iran between January 2003 and October 2007. Another huge penalty for carrying goods that had never touched the US.

The issue at hand is trade sanctions and all of the pitfalls associated with them if you are US based, importing into, or exporting out of the US. As pointed out in this recent World Trade article on “avoiding the pitfalls of trade sanctions”, a company has to deal with:

  • (broad) country sanctions,
  • import or export specific country sanctions, and
  • Specially Designated National (SDN) sanctions against
    front companies, non-state entities, or individuals

maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury and:

  • denied persons list and
  • entity list

maintained by the Bureau of Industry and Security of the U.S. Department of Commerce.

There are dozens of country sanctions, hundreds of import/export (commodity) specific sanctions (and more could be on the way, including, of all places, a new sanction against the UK which could appear as early as 2013 as a result of allegations that they gave Airbus illegal subsidies (as per this recent Daily Mail article). And then there are thousands of denied persons and entities and this list also changes regularly.

So, what can you do? You can start by monitoring the sanction programs on the Treasury web site, country information, and the SDN list.

Then you can monitor the denied persons list and the denied entities list on the Bureau of Industry and Security site, which summarizes a multitude of export administration regulations. But considering that these are only summaries, and the full details can only be found in the Federal Register on the Department of State web site, including the pages on non-proliferation sanctions and chemical and biological weapons sanction laws as well as the pages of the counter narcotics group, you would also need to monitor the pages of the office of terrorism finance and economic sanctions policy, and the energy, sanctions, and commodities group of the bureau of economic and business affairs.

But that’s a lot of work … and it may not be enough! So what’s next?

Can You Endure the Exacerbated Euro?

Greece may be almost taken care of, but now Spain (and Portugal) are threatening to endanger the Euro’s future. Procurement’s problems with the Euro are far from over. But what can a Procurement Professional do?

Be cautions and ever vigilant. As explained by Julian Catchick in this recent article over on CPO Agenda on “How to Deal with the Troubled Euro”, about the only risk minimization strategies a buyer has available to her are to:

  • hedge,
  • spot buy in bulk to take advantage of a favourable exchange rate movement, and
  • fix the exchange rate with suppliers for a mutually agreed duration.

All of these strategies have their advantages and disadvantages.

  • Hedging on a different currency that tends to fluctuate in a manner opposite to the Euro (going up when the Euro goes down and vice versa) can mitigate the impact of a rapid Euro fluctuation if currency trades are made at appropriate times, but if the performance of the currency hedged in is not what is expected, losses can actually mount.
  • Spot buying can reduce acquisition costs significantly if done at the proper time, but if too much inventory is bought too early, inventory management costs will go up and eat into the savings.
  • A fixed exchange rate will mitigate currency fluctuation risk and allow for predictable purchase costs, but since the supplier will have to assume additional currency risk, a buffer will be built into their costs and the organization may end up paying more than it needs to.

Regardless, one strategy that should not be pursued is pulling out of the countries in question. Even though some banks are minimizing exposure to these countries, it is not the country that poses the risk to the buyer, but the supplier. As Julian states, it is not likely that buyers face a material risk as long as they look into the suppliers’ financials and credit ratings and also establish how balanced their portfolios are across other geographies. Plus, given that the buyer can get much credit better terms than the suppliers in these countries, the buyer has an opportunity to reduce costs further by pre-paying for goods and services (with a stable supplier) at a substantial discount. Suppliers need regular cash flow, and if their terms are 30%, and your terms are 5%, there’s no reason that your Procurement organization couldn’t extract a 20%+ discount due to their cost of capital. That’s a smart Procurement move!

And if there is concern about future risk, build additional break and termination clauses into the contract. If a major currency fluctuation (or collapse) would make the supplier potentially insolvent, give the buying organization the right to terminate the contract, just like you’d do with any insurance or hedging contract. But, as Julian advises, don’t forego long term (strategic) relationships just because there is a potential currency risk.