Category Archives: Finance

Trade Optimization Hits Mark for CFO’s Top 2010 Concerns

Today’s guest post is from Matt Gersper, founder and president of Global Data Mining, who will be hosting a webinar on Trade Optimization on Thursday, July 15, 2010 from 2:00 pm to 3:00 pm, EDT.

New government regulations and ineffective supply chains are costing U.S. businesses millions of dollars in unnecessary fees and expenses, destroying company profits and eroding global competitiveness. Understanding risk factors associated with international business transactions can help companies estimate the financial impact these risks may have on their business and provide a framework for fixing the problems and restoring lost profits.

Draining the Supply Chain

For financial executives, the impact of supply chain risks, trade policies and regulations is a major concern. A recent study concluded international trade effectiveness and “hanging on” to the company’s hard-earned cash are top concerns for CFOs in 2010.

There are four main risk factors adding unnecessary costs to international transactions every day:

  1. Government regulations
  2. Delays in the supply chain
  3. Inadequate internal and external controls
  4. Inaccurate or obsolete information
 Top Internal and External Concerns for CFOs

A study by APQC and Global Data Mining revealed a typical U.S. bound international supply chain performs perfectly less than 10 percent of the time, internal controls for cross-border transactions are 200-times worse than a company’s accounting controls, and a McKinsey study estimates cross-border volume will be increasing seven-fold in the next 15 years. These conditions create chaos in many supply chains and cause delayed shipments while adding millions of dollars of unnecessary costs and creating unknown risks for companies.

Stop the Bleeding

Optimizing global trade effectiveness and improving supply chain speed can inject trillions of dollars into the national economy this decade. That translates into billions of dollars for states and millions of dollars annually for U.S. businesses.

It is time for business executives to quantify unnecessary trade costs, understand the significant financial opportunities available by optimizing global trade business processes, and take action to return these costs to the company’s bottom line.

According to an AberdeenGroup study of 233 enterprises, “A $1 billion company that imports a third of its goods can free between $10 million and $40 million in cash by better controlling its basic global trade processes“. The specific areas recommended for improvement are: trade agreement management, sourcing opportunities, foreign trade zone utilization, and supply chain finance strategies.

Independent analysis by Global Data Mining of more than $178 billion in U.S. imports has consistently supported the conclusions reached by the AberdeenGroup. Applying the Aberdeen metrics to the $1.9 trillion in annual U.S. imports would create an annual cash infusion into U.S. businesses of between $58 and $232 billion. Imagine the impact this would have on U.S. jobs and in strengthening the economy. In comparison, the total funds for the American Recovery and Reinvestment Act of 2009 awarded in 2009 was only $183 billion. And only $54 billion was actually paid out.

Big Brother

The new Importer Security Filing regulation, commonly referred to as 10+2, gives the U.S. government additional powers to confiscate a company’s cash . Customs and Border Protection’s (CBP) recent publication, “Trade Strategy for Fiscal Years 2009-2013,” should be a wakeup call for every CFO. Astonishingly, the CBP report lists “Enforce U.S. Trade Laws and Collect Accurate Revenue” as its number two strategic goal ahead of “Advance National and Economic Security.”

In Q3-10, CBP will begin to issue fines for non-compliance and there will likely be more frequent holds on shipments for non-compliance. An important study by the National Association of Manufacturers estimates the ISF regulation will create a permanent 2.8 day delay in supply chain speed. If the entire nation suffers the 2.8 day delay, it would be the equivalent of a $27 billion to $43 billion tax on U.S businesses, using the Purdue University Study cost model for supply chain delays.

“To put the cost in perspective, it is virtually the equivalent of doubling the import tariffs that manufacturers now pay to bring products and components into the United States“.

John Engler, president National Association of Manufacturers

To make matters worse, a recent study by PricewaterhouseCoopers found that supply chain disruptions destroy shareholder value and corporate profitability. The study showed the market is quick to punish companies that report supply chain disruptions. On average, affected companies’ share prices dropped nine percent below the benchmark group during the two-day announcement period.

Conclusion

Poor controls, government interference and regulations, supply chain disruptions and bad information negatively impact the bottom line. Companies cannot effectively compete on the global stage with outrageous supply chain costs, fines and market-based penalties of this magnitude. Financial executives must stop the money drain by identifying hidden and unnecessary costs and then take action to optimize business processes and return those costs to the company’s bottom-line.

Thanks, Matt!

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Speaking Like a CFO, Part I

Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

In my experience, those procurement and SCM (Supply Chain Management) departments who invest the time and effort to develop and master the skill and perspective of “speaking like a CFO” are the departments heading to the top of the profession. On the other hand, those departments who don’t – or won’t – master this skill seem to be perpetually stuck on the tactical hamster wheel.

I’ve touched on this subject during numerous conference presentations, but it’s important enough that I will risk repeating myself in order to reinforce a few key themes:

  1. You need to adopt and speak the language of the executive suite (the “financial language” of the CFO) in order to be effective in your communications with senior management.
  2. Develop a vision with BOLD objectives that tie directly to senior management’s interests and objectives (EPS, ROIC, cash flow, risk management, etc.).
  3. Lay out your transformation plan and detailed roadmap (note: this starts with a comprehensive “current state assessment”, compares the current state to best practices, and then uses the gap analysis as input to a well-constructed transformation roadmap).
  4. View technology as an enabler of your transformation plan and stretch objectives, not an end to itself.
  5. Build your business case (what you expect to deliver, in exchange for resources and budget).
  6. Be willing to make a commitment (of new $ results) in order to gain top management’s commitment and support.
  7. Finally, lead and make it happen.

You can find out more about this subject by downloading the following free white-papers on the Greybeard Advisors website:

Thanks, Bob!

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Finance Needs Spend Analysis and e-Procurement

Basware recently released its annual “Cost of Control” study for 2010, which contained, among dozens of other statistics and tables, the top 10 challenges for Finance over the past year. Reviewing them, it immediately struck me how most of them would be addressed with the adoption of good, modern, spend analysis and e-Procurement solutions. For example:

Spend Analysis would solve:

  • Spend VisibilityYou’d instantly see what you are spending, with who, for what, and by whom
  • Difficulties in Realizing Cost Saving OpportunitiesA good spend analysis system instantly presents you with the low-hanging fruit and gives you the power to easily explore over twenty different types of savings opportunities, as discussed in the recent Illumination on Strategic Spend Visibility.
  • More Visibility into Contract ManagementIt’s easy to integrate contract management into a modern spend analysis solution, even if you don’t have a contract management solution! Just create a contract dimension, as per this post on integrating contract management and spend analysis, and you’ll see not only what you are spending on contract, but what’s not being spent on contract. This visibility into contract and non-contract spend gives you an instant read on contract management, and what you need to do to fix it.
  • Difficulties in Realizing Cost Savings Across the BusinessBy integrating AP, Invoice, and Contract data, you can see not only what spending is on contract, but what spending is at contract rates, or, in the case of best-price contracts, where pricing isn’t trending down where it should be. This allows you to go after overpayments to realize the negotiated savings. Also, you can see when you are hitting discount or rebate thresholds, and aggressively go after those as well.
  • Need to Squeeze Suppliers on Payment TermsWhen you are realizing your negotiated savings, there will be less of a need to squeeze suppliers on payment terms. Plus, improved visibility into spend puts you in a better position to take advantage of early payment discounts, which will help you save even more!
  • Increased Supplier RiskMany modern spend analysis systems integrate, or allow for the integration of, third party data feeds from the credit agencies that track financial risk. This will give you a quick insight into the majority of suppliers who are most likely to go bankrupt. While it won’t be perfect, it’s much better than nothing.
  • Environmental Regulations / Compliance Integrate ERP data, and you can calculate carbon output, energy usage, water usage, etc. and automate production of your social responsibility and carbon footprint reports!

E-Procurement would solve:

  • Need to Improve Invoicing and Payment ProcessingE-Invoicing allows for automatic receipt, matching, and, if it meets the defined payment rules, automatic queueing for payment and e-payment systems allow payments to be queued and made automatically.
  • Need to Automate Financial Processes More QuicklyNot only does e-Procurement allow every step of the procurement process to be automated, but it allows your procurement professionals to process POs, invoices, payments, etc. on an exception basis only — which means they only have to get involved when there’s a problem.
  • System Integration / Technology ChallengesMost modern e-Procurement platform providers already integrate into most of the major ERP and relational database systems on the market, and there are scores of specialist shops that can assist with custom integrations.

In other words, if Finance wants to solve it’s greatest challenges, spend analysis and e-Procurement solutions are the answer.

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CFO’s Lesson from the Downturn: Too Little, Too Late

A recent article over on CFO, which states the obvious, says that big lesson from the downturn is to “cut inventory, not people”. The timing of this is so poor it’s shocking! Why couldn’t they have run this *before* organizations cut so many people that joblessness came close to reaching an all time high: 10.1 in October of 2009 compared to the all time high of 10.8 in November of 1982! (Source: The Misery Index)

As noted in the article, there is a huge savings potential in inventory reduction, which ties up working capital, eats up storage fees, and risks significant losses from obsolescence if the product is not sold before it nears the end of its useful life. In fact, I’m willing to bet that if the right end-to-end inventory optimization strategy was employed, the average mid-sized company (10M to 500M in revenue) would save significantly more than the 520K saved by the average company in the report. But still, even if your company only saved the average amount from its inventory reduction effort, it would save 30% more than the average savings the average mid-sized company obtained last year by slashing headcount. Headcount which you need if you’re going to recover when the economy picks up — because if you’re regularly turning away business like the contractors in Pittsburgh (see the Purchasing Certification Blog), eventually word is going to get around that you’re not interested in new business and then, because potential customers stop calling, you’re going to stop getting new business. Instead of growing, you put yourself on the fast track to bankruptcy!

So cut your inventory, optimize your working capital, and spend more strategically. Not only will you save more, but you’ll make more too when times are good!

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There’s No Need for CFOs to have Poor Visibility of Key Financial Information

A recent headline on the Supply & Demand Chain Executive site that stated “poor visibility of key financial information [is] undermining CFOs’ confidence in company performance” commanded my attention because there is just no need for this in 2010. The article, which referenced Basware‘s 2nd annual global study on “The Cost of Control”, noted that only 50% of finance executives profess a high level of confidence in the performance of their departments and only 44% maintain this level of confidence when considering the company’s performance overall.

This is, in a word, pathetic. There’s no need for this. This is not 2000 when spend visibility solutions were just hitting the market, when they cost way too much for the average organization to afford (as they started in the 7-figure range, compared to the 5-figure range that many great solutions start at today), and took weeks, if not months, to update the data warehouse when inaccuracies were found. This is 2010 when you can drill around a spend cube of up to 50M transactions on your laptop, in real time, and reclassify transactions, on the fly, in a matter of seconds. Or, if you have a nice enterprise server to play with, you can drill around a spend cube of up to 500M transactions in real-time and reclassify transactions on the fly.

(If you don’t believe me, and are in the market for a modern visibility and data analysis solution, please contact Lexington Analytics* and ask for a demo — and watch what they can do with BIQ in 45 minutes or less. They’ll even do it on your multi-million transaction data set to prove there’s no trickery involved.)

Plus, there are now a number of vendors with good platforms on the visibility front that can handle very large data sets and a few of them, like Rosslyn Analytics, even do it over the web. And while not all of these vendors will be able to rebuild your cubes in real-time if you choose to change dimensions or reclassify a large number of transactions, they all support rapid drilling and custom report creation so that, even in the worst case, you come back tomorrow and you have your answer. In other words, there are a large number of spend visibility solution providers that will more than meet the visibility and reporting needs of the CFO (even if they are a bit lacking when it comes to power analytics, which is what you need for true strategic spend analysis). And if you have a decent, modern, e-Sourcing or e-Procurement solution, if you don’t already have an integrated spend visibility solution, you most likely have easy access to a spend visibility solution (as most suite providers either have one or have a partnership with a best-of-breed provider) and it’s just a matter of licensing the module and connecting the data feeds. Then your CFO is good to go.

So I don’t want to hear that your CFO doesn’t have good visibility, because that just means you haven’t done your job and implemented the spend visibility system you need to take your sourcing and procurement to the next level. A level you want to get to because, as I indicated in Sourcing Innovation’s recent Illumination on Strategic Spend Visibility, the strategic spend analysis program it will enable could multiply your organizational savings by a factor of five in the first three years and generate strong returns for years to come!

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*There are other consultancies, and even other distributors of BIQ for that matter, who can do this as well, but, so far, only Lexington Analytics has indicated to me both their desire to set the market straight and their willingness to do a no-commitment demo for anyone who is serious, so I mentioned them. If any other vendor is willing to do the same (no-commitment demo), please feel free to leave a comment.