Category Archives: Market Intelligence

When Debating Where To Open Your Procurement Centre of Excellence

May we recommend getting way ahead of the curve and selecting Merv, Turkmenistan, which is the oldest and most completely preserved of the oasis cities along the Silk Roads in Central Asia and which was likely (briefly) the largest city in the world in the 12th century. It’s a World Heritage Site which has likely been continuously inhabited for over 5,000 years, centrally situated between Asia and Europe, and not that far from the Arabian Sea (which leads into the Indian Ocean which is, as we know, situated between the South Atlantic and Pacific Oceans).

We all know that nations and societies rise and fall and that what once was great can be great again, with China being one of the best examples. Over the last few thousand years it went from the global powerhouse to a closed society back to the global powerhouse which is projected to soon be the largest economy in the world in terms of GDP. Russia is in the same rise and fall cycle and when it rises again, its rise will likely bolster the surrounding former Soviet Union countries as well.

But most importantly, it’s about as close as you’re going to get to the Door to Hell, and given that Procurement is Hell, as we have been painfully illuminating in our 101 Damnations Series (with links to the first 50 posts indexed), it just seems to make sense.

 

photo by Tormod Sandtorv

Economies of Anti-Scale

Late last month, Mr. Smith reposted a couple of great posts on why Bigger Procurement is Not Always Better Procurement (Part I and Part II) over on SpendMatters UK. While sometimes bigger spend equals bigger discount, this is typically only true for the acquisition of consumables where there is a predictable economy of scale that kicks in at higher volumes — such as the production of identical goods on a production line or the sale of multiple software licenses.

In some markets, as Peter points out, increasing volume decreases costs. Let’s review his examples to understand why.

Short-Term Contingent Labour

Let’s say you want 100 additional workers for 20 days to help you stuff boxes for the Christmas rush. You might think that you should get a much better rate than the 10 workers you hired for your annual 4th of July promotion, but this is not likely to be the case. First of all, lots of organizations in your position will want extra workers for the Christmas rush, and the contingent labour organization will only have so many. Secondly, even if there is demand, why would an organization want to hire resources that will then be on the bench until at least February (for the mini-Valentine’s day rush)?

Bulk Pre-Paid Hotel Room Rates for a Year

Hotels, like airlines, make their money during peak travel and peak conference / festival seasons, and during these times, when they can charge the full amount allowed under law, the last thing they want to do is give you a room for 30% off of the normal rate, which is typically less than 35% of what they could be charging. As a result, the best deal you’re going to get is the average price they got for a room last year, as they will be hedging their bets.

Energy

Most energy plants still rely on oil, coal, and natural gas and, as a result, energy costs are dependent on the somewhat unpredictable prices for these limited resources. Plus, these energy companies can always get the maximum allowable price from consumers and small to midsize businesses with no negotiation power, so if they are selling most of the energy they are producing, and giving a big contract might require them to occasionally buy energy from the spot market during peak (heating/air conditioning) season, your big contract, that requires a big discount, is not attractive to them.

These are all economies of anti-scale. An economy where volume increases uncertainty (such as the short term contract for contingent labour who could be benched for long periods of time if hired by the contingent labour provider or the energy example), decreases profitability (such as the hotel example where having to give you a room during peak seasons cuts profit by 60% or more), or increases overhead cost per unit beyond a baseline is anti-scale. This last case includes any situation where customization is required or limited edition runs are required, as is common in jewelry or toys and games. Customization requires labour, and beyond a certain number of customized units, the provider would have to hire more labour who could not be fully utilized at the time of contract signing. This adds risk, and cost. Similarly, it does not matter how many limited edition collector cowbell* orders of 1,000 you put in if each requires a specialized mould to be produced. Each mould and line set up requires a fixed amount of time and that fixed overhead does not scale with more custom orders.

Thus, when sizing a spend opportunity, it’s important to first identify if you are dealing with a scale or anti-scale economy. There will typically be a much larger savings potential with an economy of scale than with an economy of anti-scale. Thus, if your organization is being measured primarily on savings, it’s important to identify those economies of scale categories as soon as possible.

* Even if you will always need more cowbell!

Societal Damnation 43: Rapid Urbanization & Mega-Cities

There are a lot of societal damnations converging upon your organization and threatening ruin. To date, we’ve covered the sharing economy, crime & piracy, fraud & corruption, (the lack of) education quality, the utter lack of math competency, (mega) project management, and Everything-as-a-Service (XaaS). Today we’re going to cover rapid urbanization and mega-cities.

You’re probably wondering why this isn’t a good thing. More people in less area means the organization can sell more goods in a smaller area and this means Logistics has less areas to ship to and Procurement fewer areas to buy for. This is true, but it doesn’t mean that Procurement’s or Logistic’s task is any easier. In fact, while rapid urbanization can often make Sales’ and Marketing’s job easier, it can make Logistics’s and Procurement’s job harder. Much harder.

Typically when a city starts to rapidly urbanize, it’s infrastructure is not ready for the rapid urbanization. It’s water plants are stressed (and may not be able to accommodate the introduction of factories that require large amounts of water). It’s energy grids are stressed (and it’s not unreasonable that rolling brown-outs or blackouts could be temporarily required at peak periods). It’s public transportation is stressed (and even getting a taxi can be a 45 minute ordeal). It’s roads are stressed (and there can be regular delays to pick up and drop off goods at cross-docks and warehouses). Plus, it’s core roads may only be 2 or 4 lanes in many places, with large trucks prohibited – meaning that Logistics will have to secure, and use, a number of smaller trucks for pickups and deliveries — which means a need for more drivers in an industry where the driver shortage is in the tens of thousands in some countries. And then there’s waste management. The sewer system could be taxed (with the end result that the rivers are used to handle the excess until they run full of waste like the Mithi river). The capacity to collect garbage might not be there (which leads to stringent limitations on how much trash a home or business can throw out unless they haul it out of town to dump by themselves). And process and recycling stations could be overloaded (leading to a stench, unhealthy buildup of noxious fumes in the air).

Then comes a rapid increase in pollution, which can see a rapid increase in hazardous airborne (smog-inducing) particles to the point where it is almost triple the national air quality average (as is the base in Beijing). This will, of course, eventually result in legislation to limit the amount of pollution an organization can produce, which will, if the organization hasn’t planned for it, result in costly production plant and fleet retrofits that could easily cost millions of dollars. However, this probably won’t equal the increase in taxes that will come if the city, state, or country tries to clean up its problem and decides to spend billions of dollars doing so (as China is about to in preparation for its bid to host the 2022 winter olympics, an effort that will cost about $7.7B using the exchange rate of August 16, 2015).

But the trials and tribulations don’t stop there. Rapid urbanization is also typically associated with a rapid increase in crime (though often temporary from a long-term perspective, this temporary increase can still last decades), pandemics (as nothing spreads airborne and waterborne bacteria and virii faster than density), taxation to pay for the necessary improvements to infrastructure and social programs, a quickly changing political and regulatory environment, and a greater potential for mass hysteria and riots. Rapid urbanization can bring with it dozens of damnations, each of which will directly and indirectly affect Procurement on a daily basis.

Sales and Marketing may do the dance of joy, but they really ought to be shot in the foot for doing so as the good can often be outweighed by the bad in the short term, and the amount of rapid adaption that Procurement might be forced to deal with may not be worth it.

Best Practices: What Are They?

There’s a lot of talk about best practices these days, but not every site will tell you what a best practice is. Technically, a best practice is a process that consistently demonstrates superior results compared to other processes that accomplish the same task. Best practices are necessary because, without them, an organization will not advance up the hierarchy of supply (as discussed by the maverick and the doctor in their article on “availability and delivery in a hierarchy of supply”) and will always be worrying about simply insuring supply and never able to truly focus on cost reduction, demand control, or value generation.

To illustrate why best practices are needed, let’s consider one activity at each level of the hierarchy of supply: supply (chain) visibility, cost modelling, demand management, and value management.

Supply Chain visibility is not as simple as getting all of your contracts in the system, mapping the supply chain for critical products down to tier 3 (or tier 4) raw material suppliers, and then setting up automated monitoring of news sources for potential disruptions. To simply take a supply chain map, set it (in the system), and forget it until an alert comes in is a disaster waiting to happen. First of all, the supply chain is not static. New contracts with new suppliers will be cut. Disruptions will force emergency substitutions to different suppliers. And the map will quickly get out of date. Moreover, not all disruptive events will make the (English) news sources the semantic event monitoring software will be parsing. For example, maybe the mining company went bankrupt, didn’t file for bankruptcy, and didn’t tell anyone. They just stopped shipping. The first inclination won’t be until a tier 3 component supplier realizes a shipment is a couple of weeks late. They may or may not tell the tier 2 subassembly supplier, who won’t realize this until a few months later when the tier 3 supplier’s shipment doesn’t show up because the tier 3 finally ran out of inventory. But it might still be a few more months before the tier 1 supplier realizes the assembly, which was being shipped slow ocean freight, doesn’t show up.

In order to ensure that the organization actually has supply chain visibility and a realistic chance of detecting supply chain disruptions, the organization will have to create procedures and processes to make sure the supply chain map is kept up to date, that regular communication happens up and down the supply chain, and that multiple news and data sources are monitored to catch indicators of potentially disruptive events. And then it will have to implement best practices to see that this is done, and verified, on a regular basis.

Now consider should cost modelling. A should cost model is only accurate as long as each of the cost components are valid. Just because the should cost model that was done two months ago indicated the likelihood of a potential savings opportunity, this doesn’t mean that the opportunity is still there today. A spike in oil prices (due to a disaster that required the temporary, or permanent, closing/capping of a well) could have jacked energy, and, in turn, production overhead and transportation costs that negated the savings that came from a demand/supply imbalance. Alternatively, if the projected cost trend was an increase, mandating the quick lock in, shifts in the market could have flipped the cost trend, which is now downward, and the organization may want to just spot buy for the next few weeks, or months, until the optimal buy time comes around. In order to benefit from cost models, the organization needs to have processes in place to make sure cost models are verified before each sourcing event, that each data feed is verified, and that the time is still right for the sourcing event.

When it comes to demand management, it’s good to identify a demand management opportunity, such as reducing the paper required by Accounts Payable by providing them with a second monitor so they don’t have to print out scanned invoices to re-key them in the system, but that only happens if the second monitors get bought, setup, used, and the AP staff change their tree murdering ways. There needs to be a process in place to follow up on the strategy, monitor consumption, and plot usage trends on a regular basis to insure that the projections are being met and that the plan is coming together.

Finally, when it comes to value management, not a single strategy can work without good processes and even better practices. Just specifying a MDM strategy is not enough to insure that it is properly implemented and followed. Cross-Functional Collaboration is more than a C-Suite mandate. SRM is both a process and a set of practices implemented by your relationship managers. And so on.

As we can see, each level of the hierarchy requires best practices to make sure the right workflows are followed and the expected results achieved.
Best Practices are what supply management thrives on. Furthermore, there is no single definition of a best practice for any function because any function that does better than the other practices available to you is a best practice, and it is not necessarily the best practice used by your competition.

Procurement Myths Debunked! Part II

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The next 10 myths are:

  • Sourcing is Better than Supplier Management for Value Creation
  • Efficiency and Effectiveness: You Can’t Have Both
  • Apply the Kraljic Model to Spend Category Procurement
  • Technology is Only a Tool
  • Procurement Owns Spend Management
  • Procurement ROI is the Single Best Procurement Metric
  • “No PO, No Pay” is a Best Practice
  • Spend Category Taxonomies are Hierarchical
  • Procurement Needs a Mandate
  • Supply Management is a Department

Of these, the doctor‘s favourites are:

  • Technology is Only a Tool
  • Efficiency and Effectiveness: You Can’t Have Both
  • Spend Category Taxonomies are Hierarchical

Technology is not just a tool, it is a transformation engine that allows its users to be more efficient, effective, and transformational. It’s a process enabler, and the process at the same time. The level of your technology is directly proportional to the level of your Procurement maturity.

With the right platforms that enable the right processes, Procurement can be efficient and effective. It can also save money and provide increased value generation opportunities. For example, using technology enabled marketplaces to identify more sustainable suppliers can not only cut costs but also increase value as it gives marketing more to work with and allows the organization to increase brand value, which correlates to sales, with less effort and less money.

Finally, there is no one taxonomy, and if there was, it definitely wouldn’t be hierarchical. Products can be grouped by function similarity, component similarity, and department or geographic utilization, for example. Services by function, geography, and strategic nature, for example. Products and services can be mixed or kept separate. The best category definition at any given time will depend on market conditions, supplier capability, and projected utilization over the expected duration of the contract.

Supply is fluid, and Procurement must be as well to keep up. And it definitely must avoid the traps laid by the common Procurement myths.