Category Archives: Finance

Speed Up Your Physical & Financial Supply Chain Integration – Use a Consultant

Inside Supply Management recently ran a surprisingly good article called “Strengthen Your Financial Supply Chain” that outlined the importance of a tightly integrated physical and financial supply chain. Although there wasn’t much that I haven’t already told you in my Finance posts and in the Supply Chain Finance Primer Wiki [WayBackMachine], it had an interesting case study about Sunfor and how it tackled the problem of unbalanced cash flows that was jeopardizing its manufacturing flows.

According to the case study, the primary reason that Sunfor had unbalanced cash-flows that were jeopardizing its manufacturing flow was slow payments – the age-old bane of suppliers in countries where credit is hard to come by and / or burdened with excessive interest rates. To address its problem, it started working with Xalles, an international business management consulting firm (with offices in the U.S., Canada, Ireland, Brazil, and Ghana as well as personnel on 5 continents) that specialize in the financial supply chain process life-cycle. Xalles helped the organization break into the government of Singapore, which is a credit-worthy client. Orders secured from the government can be presented to their bank, which is much more willing to finance orders from a local government than from an unknown business half-way around the world. The financing allows Sunfor to maintain steady production while waiting for the inevitable slow payments from its global customers.

Of course, this is just one of many ways you can improve your financial supply chain. The question of where to start is a difficult one, and precisely the area where you should consider bringing in outside help to guide you down the road. Xalles financial supply-chain process life-cycle covers demand management, strategic sourcing, contract management, supply management, order management, logistics management, receipt management, payment management, accounting, compliance, and data management. Furthermore, as per the Global Trade wiki-paper, both the import cycle and export cycle typically consist of 14 steps. This makes the question of where to start dizzying for a novice attacking her financial supply chain for the first time.

As the article points out, an experienced consultant will be able to quickly focus on your most significant problems that will yield a significant improvement when addressed. As the article notes it might be as simple as instituting basic process re-engineering with the proper people to implement a “people solution” quickly without having to build or integrate entirely new systems or it could mean a $50,000 automation solution using simple repository tools that allow users to access paper-based information through the web. A consultant will be able to help you break down the overall project into a series of mini-projects, each with its own business case, to help you identify the right time to pull the trigger on each step.

So if you think you’re inefficient on the financial side, and if you haven’t addressed your financial supply chain, you can bet that you are, a good place to start is to call in an expert consultant who will analyze your processes and systems, identify the inefficiencies and how much they are likely costing you, and layout a roadmap for moving forward. It’s better than standing still. Especially when consultants are cheap.

Maximum Results Come From Supply-Based Spend Management

Chief Executive recently ran an excellent article by Drew Morris on “Leading Your Business to Maximum Results” that noted that the best way to boost results is to first identify the best ways to boost results, and then to go and do them. It described the methodology of Insight-Based Management that takes the standpoint that a company that wants do do well should first identify the performance the owners and influential analysts expect, and then work towards achieving that goal. For a private company, this means sitting down with the owners and investors and having an open and honest dialogue. However, for a public company, it can be a bit trickier. A public company needs to analyze it’s stock price to figure out whether adding another percentage point to the revenue-growth rate is more valuable than another point of profit margin. According to the article, the answer is in RVG – Relative Value of Growth, which is determined by the following formula:

Increase in EV due to 1% higher revenue growth rate

Increase in EV due to 1% increase in operating profitablity

 = RVG

Once a business knows it’s RVG, it then has to identify potential actions that will increase RVG. Potential actions include:

  • Price optimization
  • Improved product/service design
  • A better marketing message
  • Cost cutting
  • Leverage of technological progress
  • A killer customer experience
  • High-value business models

All of these actions have one thing in common: supply-based spend management. Even though cost-cutting might be the only action entirely under the control of supply-based spend management, each of these actions is critically dependent on supply-based spend management for successful execution. You can’t have a killer-customer experience if you don’t get the product/service to the customer, and do so at the right place and right time. The supply chain organization is in the best position to leverage technological progress and help improve product/service design. Being able to meet an optimal price-point in a target market will depend on spend management being able to keep costs down enough to meet the target price, and a well-run supply chain organization is a high-value business model in itself, as well as a basis for a better marketing message.

Of course the key is to determine the best actions, or those that will give you the best results. This requires calculating the revenue and profit gains that will result from each potential action, based on the profit power values for a company (which define the % profit increase due to a 1% change in the primary profit drivers), as well as the up-front costs. Then the profit associated with each potential action can be compared and the best actions taken.

Since RVG is hard to calculate for a private-company, and thus hard to manage by, and since wealth creation will improve RVG, these actions can also be compared using EM – Economic Margin, a wealth creation metric that

  • allows wealth creation by an action to be accurately gauged
  • is easy for the “numbers people” to understand and calculate
  • makes intuitive sense
  • allows for comparisons
  • is applicable at all levels of a company
  • is equally suitable for public and private companies

It is calculated using the following formula:

Cash Flow from Operations – Cost of Capital

Invested Capital

 = EM

Furthermore, whereas RVG-based calculations tend to maximize the RVG-weighted profit and revenue growth of a company’s existing portfolio of businesses (where each could be based on a specific product or service offering), EM easily allows for changes in the portfolio to be considered.

Although the article is quite lengthy (about 15 pages), it’s a very good read and a must for any supply chain manager who wants to understand how the senior finance people determine which business unit’s proposal is the most valuable one to the business and, thus, which proposal they should allocate funds to. Being able to back up your proposals with these calculations relative to other actions the business can take will put a lot of weight behind your proposal and possibly smooth the way to getting that budget for a new system, warehouse, or team member approved faster.

Expanding Procurement’s Role in a Financial Services Company

Today’s guest post comes courtesy of Per Blomquist, Katie Boord, and Bob Derocher of Archstone Consulting (acquired by The Hackett Group), a consulting firm that focuses on strategy and operations consulting in supply chain, strategic sourcing, and procurement.

With today’s uncertain economy, volatile capital markets, and ever-worsening credit crisis, it is more important than ever for companies to stay focused on spend management in order to weather the storm.

While product-based businesses tend to have fairly mature procurement organizations due to the criticality of direct materials, service-based businesses often lag behind. Without a prominent and centralized role, and without the leadership of a CPO with budgetary influence, procurement groups within these companies often struggle to make inroads into functional silos where much of the enterprise spend resides. Bringing this spend under management by a disciplined procurement organization can have a dramatic impact to the bottom line.

Recent experiences with clients in the financial services industry have illustrated the existence of decentralized procurement efforts by functional areas such as marketing, e-commerce, legal, and collections. These engagements have highlighted some critical success factors for procurement organizations looking to break down barriers to spend beyond their current scope, as well as the resulting opportunities that exist.

CRITICAL SUCCESS FACTORS

  1. Executive Sponsorship
    In the absence of a CPO, procurement organizations need to have visible senior management support in order to encourage business units to partner with them.
  2. Change Management and Communication
    Recurring and consistent communication is necessary to convey the spend management goals of the company and the value that the procurement organization can provide in order to meet those goals.
  3. Spend Analytics
    All external spend data needs to be compiled, scrubbed, categorized, and verified in order to understand what products and services are being purchased from which vendors by which areas of the enterprise.
  4. Partnership Development
    Procurement “ambassadors” need to meet with senior stakeholders across the enterprise to articulate their value proposition (see three guiding principles listed below) and explore partnership opportunities.

    • Efficiency
      Providing best-in-class tools, templates, and processes that can be deployed quickly with minimum effort from the stakeholders.
    • Flexibility
      Supporting stakeholders with any part (or all) of the procurement process.
    • Stakeholder Ownership
      Assuring the stakeholders that the procurement organization will not dictate vendor decisions.
  5. Results Tracking and Reporting
    Results (e.g., savings, improved contract terms, enhanced supplier relationships) must be tracked and reported to ensure appropriate progress and to bolster enterprise support.

OPPORTUNITIES

  1. Increased Savings
    The engagement of procurement organizations in the sourcing of categories such as Search Engine Marketing, Online Banner Advertising, Corporate Jets, Debt/Credit Protection Outsource Provider, Online Banking Website Design and Development, Online Banking Middleware Solutions, Market Research – Consumer Insights, and Consulting Services (to name a few) can result in millions of dollars in incremental savings and cost avoidances. Each “win” can strengthen existing stakeholder relationships and generate new partnership opportunities through referrals.
  2. Decreased Risk
    Employing a disciplined procurement process can reduce enterprise risk through consistent NDA execution, standardized contract terms (including security and insurance requirements), and transparent communication of vendor utilization and performance metrics.
  3. Improved Governance
    The tracking and reporting of procurement results can increase executive awareness and organizational accountability to formal savings targets. Spend analytics can support joint initiatives between procurement and finance organizations, such as the restructuring and redefining of AP account codes to enable the monitoring of category spend and policy compliance.
  4. Enhanced Process Efficiencies
    Utilizing standardized processes and templates can save time and avoid duplication of efforts. Furthermore, better procurement results are achieved when best practices are followed, and lessons learned are communicated across the enterprise and leveraged for further improvements.

The authors would welcome the opportunity to discuss your experiences on this topic. They can be reached by email.

Do You Have A (Cost Reduction) Plan?

Today’s guest post is by Bernard Gunther (bgunther <at> lexingtonanalytics <dot> com) of Lexington Analytics.

Financial Services companies buy almost all “indirect” goods and services. This is exactly the type of procurement that every company does. One might imagine that Financial Services companies would be able to leverage the large amount of work done in all these other companies to become best in class. In turns out that they don’t. Purchasing Organizations at most financial institutions do not historically have the best reputation for delivering results. If you are leading the procurement organization, you need to change this general impression. The easiest way to do this is to deliver results. To deliver results, you need to have a plan.

Your plan needs to describe to people where you plan to start, what you are going to do and how everything is going to be done. The easiest way to create this plan is by reviewing your basic spend cube information. The spend cube takes all your AP spending from one or more systems (cash out the door), groups vendors together (when they appear multiple times) and assigns a commodity code to each transaction (based on a series of rules, generally based on GL code or vendor). From this, you can get reports by commodity on the top vendors, the top organizational units and the total volume of activity.

Using the spend cube data, you can develop an accurate and meaningful plan. A way to start the plan is to take each category and assign it to an action group (below). The action could be to source a category, to do a demand review, to do an Invoice Review or any other type of savings activity your team is capable of delivering. The category could be the full spend in a category or could be a sub-segment (e.g. geography / business unit). For each category, you need to tag spending as:

  • Completed.
    This category was recently done and no further work is required at this time
  • In Process.
    There is a project underway
  • Wave I.
    What you plan to start immediately
  • Wave II.
    What you plan to do after the first wave
  • Wave III.
    Other categories that you know need to get done
  • Further research.

Now that you have a “strawman” plan, you need to see if you have the resources to get this done and if key stakeholders agree with your “strawman”. Gaining stakeholder buy-in will help you understand the true situation “in the field” and will likely get you key resources to address the spending.

Having good spend data will enhance your credibility. Without good data, your first meeting with the Retail group could be “We’re from Procurement and we’d like to help. We think there might be an opportunity to save money. Can we do something for you?”

With good data, your first meeting with this key stakeholder could be “We think there is an opportunity for sourcing PCs. You’re spending $2.3 million with 2 VARS. The rest of the bank is spending $4.5 million and using an additional VAR and buying direct from a manufacturer. Looking at your pricing on your most frequently bought laptops, the Technology group is getting 7.3% better pricing. This means you’re looking at over $150,000 in annual savings. We want your help in doing the following [insert plan here – with details on who should be involved and what it means for them].”

Without a plan, the best you can hope for is another meeting. With a plan and good data, you can get a stakeholder fully bought into your idea, they can give you authorization to proceed and many times, they will give you the support and resources you ask for.

For one bank with about $750 million in spending, we created a plan for savings. This plan targeted savings of $85 million in 3 waves across 113 initiatives. For each of the 10 major department heads, we could tell them how much spending was involved in each initiative, which vendors might be impacted and which budget centers we wanted resources from. Over the next 15 months, we conducted the initiatives and generated $94 million in annual savings on 80% of the baseline. As part of the program, we involved finance to sign off on each of the results so the savings could be measured and tracked. The results were incorporated into the spend cube to support ongoing monitoring of the spending.

Is such a plan hard or expensive to create? The short answer is “no”. New tools have made this process faster and much less expensive to do. For an organization with less than $500 million in spending, a good plan (including building the initial spend cube and conducting the initial syndication) can be put together, with a focused effort, from scratch, in 6 to 8 weeks. And some organizations that have done much of the preliminary work can get it done faster.

A good plan, with good execution can lead to significant results. In the world of procurement, the data you need is there for the taking. All you need to do is to use it.

Thanks Bernard!

Don’t Wait for the Burning Platform (Start Your Procurement Transformation Now)

Today’s guest post is from Robert A. Rudzki, a former Fortune 500 senior executive of supply management who now advises other companies through Greybeard Advisors LLC, a strategic management consulting firm. Bob has authored several business books including the critically acclaimed Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise and Straight to the Bottom Line. Bob also writes the Transformation Leadership blog for the Supply Chain Management Review. Bob can be reached at rudzki <at> greybeardadvisors <dot> com.

 

A few years ago, US financial institutions were making so much money that their procurement departments were having great difficulty. They could not get any serious time commitment from their executive staff to discuss procurement and supply management opportunities.

I know that’s true, because I heard it directly from several chief procurement officers at insurance companies and banks, who approached me after I made a presentation on the West Coast. These CPOs were, to state it mildly, very frustrated in their jobs and with their senior management. They had a sense that there was real opportunity, but couldn’t get their senior management’s attention.

Today, the executives of many of those same companies probably wished that they had started paying attention to procurement and supply management back when they did not NEED to. In fact, the best advice for senior management, including senior supply management, is this: don’t wait until you are standing on a “burning platform”. Start the procurement transformation process now.

It may be easier, in some corporate cultures, to tee up a business case for change when things are going poorly; for example, when your company is on a “burning platform”. It’s a real sign of good leadership, and forward-thinking management, however, to decide to transform when you have no immediate urgency to do so.

One of the implicit challenges in building a case for procurement transformation in financial services is the atypical cost structure. Where are the direct materials (other than people) – that typically occupy center-stage in strategic sourcing? To a manufacturing eye, the banking industry cost structure appears strange – essentially all people and the so-called indirect spend. But, as some of you may know, indirect spend offers a larger percentage cost reduction opportunity – often well above 15% – when addressed with a robust strategic sourcing and negotiations management process (“SSNM” in Greybeard Advisors’ parlance).

Several of my colleagues at Greybeard Advisors have deep experience applying strategic sourcing in the financial services industry. The benchmarks from their experiences confirm the enormous potential to impact the bottom line at financial services companies.

Similarly, we have applied strategic sourcing in numerous “non-traditional” areas of spend at manufacturing companies, including spend for financial and marketing services. There are sizeable percent cost reduction opportunities – again, if approached with a genuine SSNM process.

Opportunities abound – but they don’t just happen by putting numbers and analyses on a PowerPoint chart. It takes real leadership, and a carefully thought-out transformation roadmap.

Thanks, Bob!