Category Archives: Finance

How Much Can You Really Save If You Switch Suppliers?

I was a little flabbergasted by this recent article over on SupplyManagement.com on how switching suppliers will save billions in the UK. While there are often savings to be had if you are willing to switch suppliers, the reality is that the savings, once the total cost is calculated and the total value derived, is never as much as you expect, especially if the product you are buying isn’t a true commodity. And even if it is, there are other considerations. Consider the following categories:

  • Office supplies
    Okay, you can always get a better quote. But remember that delivery charges often aren’t fixed (and will usually increase beyond the average rate of increase by the local delivery company) and the better the deal you get on negotiated SKUs, the more they’ll overcharge you on anything off contract (and, if you’re not watching, charge you even more than what you would pay in the office supply store down the street). The “loss leader” is always designed with your loss in mind.
  • Communications
    Okay, you can always get a cheaper (mobile) plan. But the cheaper the plan, the more you pay on overages, roaming, and long distance (LD). Have an executive with an unpredictable travel schedule? Watch your roaming and LD costs skyrocket! Have an organization where 20% of users don’t fit the basic plan profiles? Watch your overage costs skyrocket! For every penny you save, you’ll lose it somewhere else.
  • Janitorial Services
    You’ll always find someone cheaper. But they won’t necessarily do as thorough a job, and if you’re not careful, they might skip the background check and you might come in some day to replace the backup drive only to realize that the backup drive is gone!
  • Contingent Labour Management (CLM)
    You’ll always get a better quote, but the less a CLM firm gets to fill a position, the less incentive they have to spend the time to find the best person for the job, especially if your competitor is paying them more to fill that same position. And, in the long run, the few hundred you save costs you a few thousand (or tens of thousand) in productivity losses.
  • Custom Manufacturing Services
    You’ll always get a better quote, but what will you sacrifice in quality? And what if they put lead in the paint, melamine in the milk, or bisphenol A in the plastic? Then what?!?
  • Advertising Services
    I’ve no doubt that you can cut any quote in half, but advertising isn’t about cost, it’s about the revenue it helps you generate. Is it really worth hiring a B player at half the cost when the A player is five times as likely to come up with a campaign that helps the organization double sales?

So while you should definitely be willing to change suppliers, don’t rush a decision and be sure to let your current supplier compete in the go-to-market if they have been serving you well. Sometimes all they need to find savings (either by being more aggressive on margin or on innovation and finding more creative ways to serve you at a lower price point) is a little incentive. And remember, it’s not worth switching for 5% that will never materialize unless it’s a multi-million dollar contract. And even then …

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Four Principles To Keep In Mind When Thinking Like a CFO

As Bob will tell you again and again one of the keys to a successful career in Procurement (which includes a seat at the C-Suite’s table) is to speak like a CFO. But if you want to keep that seat, at some point you will have to think like a CFO or you will quickly be dismissed if your plans don’t measure up to their high expectations upon careful review.
But how do you think like a CFO when it’s often challenging enough just to speak like one? A recent article in the McKinsey Quarterly had some good advice to get you started.

According to “the CEO’s guide to corporate finance”, the following four principles will help you choose the alternatives that qualify as great financial decisions and that will win you a lot of attention in the C-suite.

  • The Core-of-Value Principle
    Value creation is a function of returns on capital and growth. Procurement should pursue projects that will generate returns in terms of productivity or cost reduction and should not ignore potentially high-return projects (such as an investment in a new, but unproven, supplier who uses a new technology) just because there is a moderate downside risk.
  • The Conservation-of-Value Principle
    Only improving cash flows will create value. Don’t pursue projects on expected ROX (ROI, ROE, etc.) metrics alone. Make sure there will also be an impact on cash-flow in a reasonable time-frame. For example, a piece of shop-floor technology that is expected to improve efficiency by a factor of 30%, reduce production costs by 15%, and generate an ROI of 5X over a 3 year life span is not worth it if it does not free up any cash flows for two years because most of the production costs are labor and labor can’t be reduced or reassigned in the short term.
  • The Expectations Treadmill Principle
    Movements in a company’s share price reflect changes in the stock market’s expectations about performance. The better the share price does, the better the company is expected to do. When the share price is increasing, the focus needs to be on projects that will support long-term growth (such as advanced data analysis systems that will allow the organization to identify cost reduction opportunities going forward).
  • The Best-Owner Principle
    No business has an inherent value in and of itself. (It has a different value to different owners or potential owners–a value based on how they manage it and what strategy they pursue.) Procurement should participate in regular cross-organization business-unit reviews and make sure it is still the best owner of each and every function under its control. If it is not the best owner of a function, the function should be reassigned or outsourced, and if it could be the best owner of a function controlled by another business unit, it should be willing to take that function over.

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Solving the 2011 Supply Chain Budgeting Dilemma

A recent post over on Supply Chain Matters by Bob Ferrari discussed the 2011 supply chain budgeting dilemma. According to Bob:

Input commodity prices are again on the rise. A recent Wall Street Journal article (paid subscription may be required) notes that in food products, metals, energy and other commodities, prices are again on the rise. As an example, because of the severe crop failure in Russia, wheat prices have risen 34%. In one year, corn is up 44%, milk 6.5% and cheese 29%. Copper is up 30% and other metals such as steel, aluminum and other metals are on the rise.

The implication is that in many industries, firms are determining whether increasing costs will be passed along in higher prices, or will be absorbed or buffered by reduction of costs in other areas … supply chain cross-functional teams will again have to ascertain what assumptions, plans and programs will need to either be accelerated or deferred in 2011.

In our view, these challenges come at a very unfortunate time. Now, more than ever, teams need to be prepared with the supply chain planning and execution capabilities required for the post-recessionary recovery. Most companies who survived the global recession have done so by severe cost cutting and reduction of headcount. While balance sheets remain cash rich and profitability remains at high levels, supply chains are probably the highest state of lean than they have ever been in the last decade.

It’s a bad situation, but it doesn’t have to be. There’s an easy fix. Stop hoarding cash, buy some new systems to increase your team’s productivity, add a few top guns, and go to work on controlling costs along the board. I know it’s never that easy in practice, but it should be.

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P.S.  (Shameless plug.) If you need help selecting those new systems, both Bob and I can help.

ISM’s Prediction for the Supply Chain of the Next Decade

A recent article over on the ISM site on “Globalization: An Endeavour in Fluidity” laid down some predictions for supply chains in 2010 and beyond which were pretty interesting as some of them indicate that supply chains will finally in a direction they should have moved five years ago (as regular readers of Sourcing Innovation and Spend Matters are well aware).

The six predictions made were the following:

  • Networks will be demand basedinstead of being inventory-focussed with the intention of pushing as much product into the market. Every market becomes saturated at some point. A supply network has to be demand based to be profitable over the long term. And sometimes, selling less at an optimal price point is more profitable than selling more.
  • Debt load will hinder, advance initiativesWhile many companies will still file for bankruptcy, those companies that have been aggressively working to eliminate debt will be left with more growth possibilities, which will allow them to fund new supply chain initiatives.
  • A shift in the value of innovationThe focus will start to shift away from LCCS (Low Cost Country Sourcing) to LCCI (Low Cost Country Innovation) as companies shift their focus to harvesting the innovation potential in the LCCS markets.
  • Sourcing markets become buyersAs the emerging markets gain a greater share of global purchasing power, organizations will repurpose their networks to supply these markets with goods and services in addition to sourcing from them.
  • Corporate responsibility as a competitive advantageSustainability and corporate responsibility is front and centre in the thoughts of every consumer these days. Those companies seen to be responsible now enjoy greater mindshares than their competitors, and this is leading to greater market shares as well.
  • United States a viable sourcing optionDue to the weakened dollar, the US will continue to remain an attractive location for foreign investment. Furthermore, home cost country sourcing will begin to take hold as many firms realize that it’s just as cost effective to source and produce locally, as it is to source and produce half-way around the world once you take into account rising transportation costs (as oil prices rise again), uncertainties, the weakened US dollar, and the savings from government subsidies and tax-breaks being pumped into the economy to stimulate it.

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Don’t Forget the Binding Ruling!

Industry Week recently ran yet another “10-step checklist” for those who are planning to offshore production of an existing or new product for the consumer market. While most of the steps mirrored every checklist that came before and contained no new advice, there was golden needle in that bale of hay that I haven’t seen before, and its one that can make or break your offshoring initiative. Step 5, get a binding ruling to determine import duties, is an often overlooked but critical step before you commit to overseas production and packaging. It can literally be the difference between healthy profit and mounting losses.

Not only can one slight difference be the difference between VAT and no-VAT markups on export, but one slight difference in opinion can mean the difference between one classification in the HTS system that carries an import duty of 5% and another classification in the HTS system that carries a duty of 10%. Literally. Consider 6204.19.40 and 6204.19.80 which are both for women’s or girls’ suits of textiles material. In the first case, the duty rate is 1%. In the second, 6.5%. That’s a difference of 5.5%. What’s the difference? In the first case, the suit contains 70% or more by weight of silk or silk waste, in the second case, under 70%. 1% difference in composition can cost you an additional 5.5%. There are hundreds, if not thousands, of other examples where a minor difference in material, packaging, or classification can have a whopping difference on your profitability. So get the ruling first. Otherwise, offshoring might not be as attractive as it looks.

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