Category Archives: Market Intelligence

Procurement Trend 05. Return to Regional and Local Sourcing

Just two very trying anti-trends remain. We’re one post away from fearlessly finishing our formidable burden, but the sour taste in our mouths still remains as we must continue to provide those factually-challenged futurists with counter-examples to the trends of their forerunners who saw this coming a decade ago. (Check the very early SI archives if you don’t believe me. Go ahead. Check. This post will still be here.) We want to abash them for their apathy, but we will leave their hard-earned humiliation for LOLCat, who wants to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these garbage hauling patrons of Quark keep pushing us trends from their flights of fantasy? Besides the fact that some of them obviously spent the best part of last decade hauling garbage, it’s probably because they look around, see the laggard organizations still struggling with the insourcing/outsourcing balance, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are losing hand over fist in their outsourcing arrangements, maybe it’s time to pull them back, especially if

  • energy, and thus transportation, costs are going higher and higher
    and since oil, natural gas, and coal reserves ARE limited, and the dwindling supplies that remain are getting harder to extract, cost have nowhere to go but up, up, and away
  • labour costs are rising in emerging and emergent markets
    and the faster they emerge, the faster labour costs increase
  • nearby markets have low transportation costs and high automation can
    contain labour costs
    since the shorter the distance, the less energy required to cover the distance; plus, intelligent automation decreases the amount of manual labour required to product any product

So what does this mean?

Understand the Total Cost of Outsourcing

Remember, it’s not just landed cost (unit cost and transportation cost), it’s also import/export costs, communication and remote management costs, on-site visits, liability costs, return costs, and other related costs. If many of these costs are rising, then outsourcing is probably not the right idea. If only one or two of these costs are rising then it depends how much, and how fast, and what the alternatives are.

Understand the True Opportunity in Near-sourcing / Insourcing

Near-sourcing will have many of the same costs, but transportation, remote management, and return costs will often be lower. Plus, if you pick/invest in a more advanced plant with newer automation technology, the higher labour costs are probably negated by the lower overhead costs, and the opportunity costs that are often lost waiting for delayed shipments, prototypes to land in your hands for testing, and emergency issue-resolution sessions (across time-zones 8 to 12 hours apart) are often minimized as well. However, a lack of automation can result in significantly higher labour costs, a lack of appropriate trade agreements with respect to the products being purchases can result in higher import or export fees, and energy costs could be higher as well (if renewables don’t enter the equation). The whole cost model has to be evaluated (and compared to the whole cost model associated with outsourcing).

And make a decision based upon true (future) costs

One should never make an insourcing, near-sourcing, or outsourcing decision on today’s costs – make it on expected costs over the next five years. Use the market data that you are collecting for market trend analysis and predictive analytics to figure out what the costs are going to be over the next five years and then choose the optimal production strategy based upon the amortized five-year cost. Consider the hard and soft costs associated with relocating production and/or services, making a change for a very short term gain will not result in any savings being realized. Do the math and make the right choice.

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Procurement Trend #06. Data-Based Predictive Analytics

Three annoying anti-trends remain. We’re so close to the end that we can almost taste the bitter-sweet victory, but the sour taste in our mouths still remains as we must continue to provide those fashionably-challenged futurists with counter-examples to the trends of their fore-fathers that no one who didn’t lock themselves in a windowless padded room would try to pass off as a trend of tomorrow. We want to shame them for their stupidity, but we will leave their hard-earned humiliation for LOLCat, who is obviously quite fed up at having to spend yet another life listening to their ludicrousness, but still finding the time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created.

So why do these pit-dwelling prophets from Hawalius keep pushing us trends from the rubbish pile? Besides the fact that some of them obviously spent the best part of last decade in a rancid cave, probably because they look around, see the laggard organizations still struggling with last decade’s technology, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are struggling with proper historical spend analysis, data-based predictive analytics is obviously a future trend, and

  • good decisions require good data

    and so few organizations have good data

  • inventory forecasting is getting harder and harder

    as sudden changes in unemployment rate, interest rates, and brand sentiment as well as unexpected supply chain delays or competitive product introductions can all have a large impact on demand

  • market prices are getting even harder to predict in volatile markets

    and profitability often depends on slim margins

Which would be great reasoning if leading organizations hadn’t figured this out over a decade ago and moved on to doing something about it a while ago!

So what does this mean to you?

Clean and Enrich Your (Master) Data

Dirty data dictates dastardly decisions. And those never end well. But don’t go crazy trying to do it. 100% clean data is a pipe dream, and, as with most situations, the 80/20, or, to be more precise, the 90/10 rule applies. Clean and enrich as required to confidently map 90%+ of spend, including 90%+ of the spend for the top 90%+ of suppliers and the top 90%+ of products. Stop when the effort exceeds the return. With a good mapping tool, the mapping can be done for even the largest Fortune 500 by hand in a week. Depending on how good the data is, the analyst might even get to 95% or even 98%. Then, identify any glaring weaknesses (such as supplier financial or risk data, market data, or cost breakdowns relative to a Bill of Material) that are important from a spend analysis or should cost modelling viewpoint, and get that data.

Put Protocols and Safeguards in Place to Keep your (Master) Data that Way

It’s going to take time, money, and manpower to map, clean, and enrich the data. This will be time, money, and manpower wasted if protocols aren’t put in place to make sure not just anyone can update master data, or at least not without review and verification. Put workflows and approvals in place to minimize the chances of bad data getting into the system or data getting out of whack too quickly.

Automatically Augment Your (Master) Data with Market Data

Good historical data is good. But current market data is better. With past and current data you can not only know current conditions, but with current market data, updated regularly, you can compute trends.

Use All the Data to Predict Trends and Make Sourcing Decisions

Use the computed trends to predict likely future conditions based upon the trends and current market movements. Based on this data, you can judge whether or not it is a good time to source a category and lock in long-term pricing.

Procurement Trend #08. Lifecycle TCO

Five anti-trends remain. We can count them on one-hand, but like LOLCat, we feel more compelled to provide stupid examples of how back-water the futurists really are when they provide us examples of trends that anyone who bothered to poke their head over their cubicle wall ten years ago would have noticed. However, we’ll leave their humiliation for LOLCat, who has obviously received very little enjoyment from this series, but still found time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created and instead focus on blasting the myths the futurists continue to propagate.

So why do these Rip van Winkles keep pushing upon us trends from yesteryear? Besides the fact that some of them obviously spent the best part of the last few decades napping, probably because they look around, see the laggard organizations still caught in the muck, and assume they can still sell last decade’s snake oil in today’s marketplace. Why do they think Lifecycle TCO is today’s cure?

  • the supply management lifecycle in a typical company has been expanding
    for decades

    and cost models rarely keep up

  • once the margin has been taken out of the unit cost and the landed cost,
    the definition of cost has to expand to realize savings

    but most companies that claim to be looking at TCO are still looking at T-CAP

  • the most out-of-control costs are typically where you’re not looking

    and that’s the way, uh-huh, uh-huh, they* like it

So what does this mean to you?

Cost Models Have to Expand

Right now, most companies that claim to be focussed on Total Cost of Ownership (TCO) are really only focussed on Total Cost of Acquisition and Production (T-CAP). They are merely focussed on landed cost and costs associated with production (waste, etc.) and distribution and aren’t looking up the supply chain to energy, labour, and raw material costs and forward to maintenance, service, warranty and return costs or even further forward to reclamation, recycling, and disposal (related) costs. Every cost has an impact and any sudden increase or decrease can completely change the model.

Out of Control Costs Have to be Found

Wherever they are. Typically, a company heavily focussed on optimization will be focussed on T-CAP but not look at the expected warranty and return costs associated with switching to a lower-cost supplier or not break down the supplier’s quote to realize that the energy costs are much higher than expected and likely to rise rapidly in the region two potential suppliers are currently located in.

Cost Control Measures Have to Be Implemented

Once the cost models are expanded, the out of control costs are identified, cost control measures are defined, implemented, and performance against them is tracked. If the out of control costs are energy costs, then the organization might decide to implement its own renewable power plant (such as a solar farm or wind farm) for fixed plant energy requirements. A sourcing project is undertaken to source the plant and then, once its up and running, additional projects are undertaken to control maintenance costs, etc. Year-over-year costs are tracked to insure the realized savings on a production-cost-per-megawatt basis are realized so that the organization will see its ROI within a defined period of time.

Piece of Cake, eh?

Procurement Trend # 11. Transparent Pricing

Only eight anti-trends remain. Doesn’t sound like much, but when you consider that we have been blasting away at these for two months now, it’s still a lot, especially since it’s going to take us another two and a half weeks to reach the last anti-trend that the futurists gave us. At least most of the “future” trends are recent enough that the older generation can actually remember their inception. (No, not the Leonardo DiCaprio movie!) But I have to agree with LOLCat that it would be nice if there was a way to stop the beat of the futurists‘ drum because, even with these trends that started in some of our life-times, the drum has been beaten to death and I fear, like LOLCat, that the futurists’ may soon return to the age old art of cat-skinning to make a new one!

So why do these hopped-up historians (who’ve obviously had one dozen lagers too many) keep pushing transparent pricing as a future trend? Besides alcohol-induced brain-cell asphyxiation, possibly because they’re still trying to figure out this new-fangled thing called a computer and still struggling to understand just what the world wide web can do for them. Regardless, it’s clear that they’ve just figured out that:

  1. the internet makes global commodity market data instantly accessible

    even in far-away places like China and Russia and Australia

  2. online marketplaces makes average market price data instantly accessible

    including prices that are actually paid by the public or contract prices that will actually be honoured because the contracts are with the public sector

  3. should cost models allow for reasonably accurate price estimation
    which can be calculated in real time using the data from #1 and #2

    so there is no excuse for not knowing when you are being over-quoted 20% by a supplier’s sales rep who thinks you are too dumb to know otherwise

So, what does this mean to you?

Commodity Markets

You should always know the current market price of any base commodity that you are buying and/or that the products you are buying are dependent on (if that commodity generally accounts for 10% or more of the product cost). You should subscribe to commodity market feeds, track them, and set up alerts anytime there is a significant change in prices one way or another over a short time period as this is often a signal to lock in a new contract (before prices climb to high), extend a current contract (if it looks like prices are going to skyrocket and then stay high for a while), or spot buy (if prices are declining and are expected to steadily drop over a period of time) until the time to lock in a new contract is right.

Consumer Marketplaces

You should always know the average price of any consumer good that you are buying in the open market or in the public market as public contracts are public! Don’t just rely on 3-bids and a buy for standard consumer goods, office suppliers, or other off-the-shelf purchases. Get baseline market data and negotiate from there based on leverage, economies of scale, and projected pricing trends.

Should Cost Models

Raw market data combined with local labour market data, local energy market data, and good should cost models will give you a good idea of what you should be paying for any custom manufactured good. Don’t go into a sourcing event without this baseline. If the suppliers have a history of colluding, and you don’t know it, that 5% you knock off of current pricing could still be 15% higher than what the supplier needs to charge to make a profit margin at the high-end of what suppliers in the vertical typically make.