Category Archives: Market Intelligence

Adoption a Problem? Incentives are the Answer!

Just make sure they are the right incentives.

As per this article by Mitch Free on Forbes.com on the Best Advice a CEO Ever Received, your incentive plan works. You will get the results you incentivize, so be careful of and monitor for unintended consequences.

As per the article, Mr. Free couldn’t understand why, when he took his car in for a wash, the attendant was so insistent in fixing a “pitting” on his windshield that he couldn’t see that the attendant even offered to do the fix for the same price as the wash and give the wash for free, which did not make much sense. So Mr. Free emailed the owner, who stated that he was paying a $5 commission on window repair sales, and none on car washes, in an effort to increase window repair sales and that Mr. Free’s e-mail explained why there was a big spike in people getting their windshields’ fixed but not getting their car washed. It was an unintended consequence of the incentive plan.

The same holds true where Supply Management software is concerned. Adoption will depend on the incentive plan. A proper incentive plan will go a long way to getting utilization, but an improper one will go even further to jeopardizing your supply management returns. For example, if you made a worker’s bonus contingent on using the new e-Procurement system, and then calculated a certain percentage of his bonus based upon total spend put through the system, you might find that, at the end of the year, that worker put as much spend as he possibly could through the system. And while you might think this is the intended consequence, you might also find that spending overall on indirect categories such as office supplies, computer and electronics equipment, and temp services increased 10% year over year. Why? Instead of doing quick RFXs and then negotiating bulk purchases with the lowest bidder, the buyer bought everything he could through the vendors already integrated (via EDI, punch-out, etc.) with the e-Procurement system, even though most of the purchases were for off-contract items that were, on average, 10% higher than rates that could have been obtained with a new sourcing contract with another vendor.

In this scenario, the right incentive plan would be to incentivize buyers on achieved year-over year savings on spend under management, where spend under management is that spend that is negotiated or managed through a supply management system, whether it is the e-Procurement system, the e-Sourcing system, or the Contract Management system. This way, the system will be used when it’s appropriate, and the buyer is only rewarded when savings are achieved.

Minimizing Late Payments

In yesterday’s post, that said don’t take late payments lying down, we noted that big customers are trying to push payment terms to ridiculous extremes and that their fantasy should not be your reality. We referenced a good article over on CFO.com that gave some advice on what do to “when your big customer wants to pay late” and concluded that if none of those tips help you out, then you should do what Pete Loughlin suggests on Purchasing Insight and name and shame them publicly. No one should ever think that 200+ day payment terms are fair. EVER!

Hopefully you’ll be one of the lucky ones and not find yourself in this situation, but, to be frank, that is not likely unless you take steps to avoid being in the situation. To that end, a recent piece in Inbound Logistics that offered some advice from Scott Pezza, a research analyst at the Aberdeen Group, had some good suggestions that you should always keep in mind.

  • Conduct Pre-Sales Credit & Risk Analysis
    You want to identify problem payers before you sign the contract. One method to do this is the credit bureaus. Another is quick calls to other suppliers. Accountants, believe it or not, are people too and, speaking the same language, they like to talk to each other. They have skills that go beyond the general ledger that your organization should be making maximum use of. Basically, if the customer always pays six months late, then you probably don’t want to turn away the business, because a paying customer is a paying customer, but you’re going to want to adjust your terms accordingly. This may mean jacking the price up (and offering early payment discounts) or forcing the customer to agree to interest and penalties. But if the customer has a history of trying to evade payments that will require significant and costly collection efforts, you probably want to turn that customer away.
  • Follow the Finances
    Don’t just use the credit bureaus to assess pre-sale credit risk, keep on top of their financials. Subscribe to a credit monitoring service that gives you quarterly updates, or a news monitoring service that tracks major stories, and get a grip on when their financial situation may be going south fast so you can get paid, or get out, before you have a situation where the relationship is not worth it.
  • Standardize Receivable, Collection, and Resolution Processes
    Always send out complete and accurate invoices, have a common approach to collection efforts, and standardize resolution processes that involve multiple parties to make it simple for the customer to understand your concerns, share theirs, and reach a resolution in a clear and concise process.
  • Make Getting Paid Easy
    Send invoices in customer’s preferred formats and, if you can, accept whatever payment method the customer wants to use – be it purchasing card, wire, ACH, or old-fashioned cheque.
  • Be willing to Negotiate Payment Terms on a Customer by Customer Basis
    Scott actually suggests to tailor collections to individual customers, but it’s better to tailor contract and payment terms and to be willing to renegotiate if the customer needs to (provided the customer really does have restricted cash-flow and is willing to make best efforts to pay on a reasonable schedule — don’t renegotiate just because they don’t want to touch the 10 Million reserve in the bank).

Hopefully these tips will help you avoid the late payment fiasco and having to name and shame your customer.

All Your Peers Are Chasing a Lost Cause — Are You? Part II

In our last post we pointed out that the number one supply management priority in the average organization is the lost cause of cost reduction. This is exemplified in many recent studies and reports, including eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report which has it as the number one priority. But this is a lost cause because inflation is back with a vengeance, food reserves are at fifty — or one hundred — year lows, critical raw materials are in very short supply, and, as pointed out in Supply Chain Insight’s recent report on “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, between 2000 and 2011, 75% of companies in process industries lost ground on margins! In other words, even the mighty are falling — year over year.

For the foreseeable future (and most likely the rest of your supply management career), costs are going up. There’s nothing you can do about it. The best you can do is control the cost increases, and make sure you do it better than your peers. SI truly believes that this will be the difference between your company staying in business and your company filing for bankruptcy.

And you will do this not by focussing on cost, but on cost drivers. What are the main components of the cost? How much does each component contribute to the cost? How much does an increase on a core component increase the overall cost? Where is the greatest opportunity to reign in cost increases through process improvements, requirement reductions (for unnecessary services or needlessly expensive materials)? Where is the greatest risk of a cost increase? What can be done to prevent it? What should be done to prevent it?

This requires your organization to acquire the following competencies:

  • Cost Modelling
    The first thing you need to do is accurately model the cost components — including raw materials, labour, energy, and services.
  • What-if Analysis
    Understand how costs will change if each component increases, decreases, or maintains stability in line with (global) inflation. Be able to model the estimated impact of product, process, or service initiatives on overall costs.
  • Optimization
    The only true way to minimize cost increases and keep costs in check is strategic sourcing decision optimization, because the only true way to minimize costs is to minimize them holistically. Reducing unit costs is pointless if logistics costs double. Reducing labour costs is pointless if quality declines and return and warranty costs triple. Only strategic sourcing decision optimization allows you to see the whole picture and minimize costs across the board.
  • Real-Time Visibility
    You can no longer get away with NOT having real-time visibility into your supply chain, which should go beyond knowing when your order was shipped by your first tier supplier. At the very least, you should have visibility into your suppliers’ suppliers across the board and you should have visibility into any third-tier suppliers who supply critical or scarce raw materials.
  • NPD with the Goal in Mind
    In their “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, Supply Chain Insights shared a great insight — most supply chains are based on functional excellence based on inside-out thinking. Companies are not clear on supply chain strategy and the delineation of the financial metrics that matter. When designing a new product, the goal is not to make the coolest (or most desirable) product, the lowest cost product, or the product you think you can charge the most for. The goal is to make the product that the organization will generate the most profit from — which is a function of margin and profit (and, specifically, the multiple thereof).

So acquire these competencies, and maybe you can stop chasing the lost cause of cost reduction and start focussing on the achievable goal of cost control.

All Your Peers Are Chasing a Lost Cause — Are You? Part I

While I believe that the average company is still chasing the cost reduction myth (as highlighted in eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report, for example), I am having a very hard time understanding why. As SI has pointed out a number of times over the past couple of years (including in it’s recent piece on the Top Ten Things To Do in 2013 To Control Costs), for any organization that has been pursuing any form of supply management over the past five years or so, cost reduction is a fantasy that’s not going to happen within your tenure. Inflation is back with a vengeance — it will be decades, if ever, before we see a return to the 1% inflation rate we enjoyed in the noughts. Global food reserves are at fifty, and in some cases, one hundred, year lows — and the past couple of years have seen riots in the first world over the cost of basic staples (like wheat and rice). And with rapidly increasing global demand, certain raw materials are scarcer than they’ve ever been. In other words, cost reduction is a pipe dream.

Moreover, recent research by Supply Chain Insights LLC (recently released in “Supply Chain Metrics that Matter: Driving Reliability in Margins”) has demonstrated that, for the average company, cost reduction never happened anyway. That’s right! You might have saved millions in those auctions when you had the power, or taken millions out of your distribution chain with optimization, but cost increases across the board ate up those savings in other areas. The researchers found that through analysis of publicly available balance sheet and income statement data [from 2000 through 2011], we find that 75% of companies in process industries lost ground on margins and only 5% of companies improved their positions on the number of days of inventory! In other words, despite all their supply management efforts, relatively speaking, their costs went up.

This isn’t to say that you shouldn’t be focussing on supply management or cost control, with rising, and increasingly volatile, raw material and commodity prices, supply unpredictability, demand unpredictability, and the rate of supply chain disruptions increasing super linearly, cost containment is a must. But thinking you’re going to reduce costs in this economic climate is foolish. The best you will do is control them — and that will be the difference, for many companies, between staying in business and filing for bankruptcy. Literally.

What you need to be focussing on is not cost, but cost drivers and how you are going to maintain visibility into those drivers to help you figure out where costs can be best contained, when your organization will likely have the greatest (or least) advantage in a negotiation, and how much cost certainty is worth. For example, is it worth locking in a one year contract when prices are volatile and possibly higher than the projected prices due to a recent disaster that reduced supply? They could go up if demand increases, but if another source of supply appears in six months, or the backlog of orders is cleared, they could return to pre-disruption levels (which will still be higher than last year).

So how do you do this? We’ll discuss it in part two.

Supply Management Economics Part IV

As indicated in our last post, the goal of this series is to bring economics to the forefront in Supply Management where it has been swept under the rug for far too long. Which is a travesty when you consider the three basic questions in economics revolve around what to produce, for whom, and how!

As a result of this, we decided we would introduce you to the economics of Supply Management (which is economics, after all), by going back to the basics (and all the way back to 1776 when Adam Smith published his treatise inquiring into the nature and causes of the wealth of nations and gave economics its independence from politics and moral philosophy).

We started by defining the production possibility curve and the concept of comparative advantage which give you the foundations required to figure out what you should be producing and what ratios are possible given the options at your disposal. Then, in our last post, we discussed the basic laws of supply and demand which ultimately tell you not only the quantities you should be producing, but for whom you should be producing them as production optimization centers around finding the optimal equilibrium between a corresponding supply and demand curve among all possible supply and demand curve pairings.

This just leaves us with the how. Classically, the answer was simple — either the goods were produced by the government or a private enterprise. But given the global nature of business, and trade, that exists today, the answer is no longer that simple. Today, the question is whether you produce the goods in house, whether you outsource production to a third party, or whether you produce them jointly (or in cooperation with) a third party.

And to answer this, you need to first get a grip on Total Cost. In economics, total cost is defined as the sum of all fixed costs, which are constant and independent of the number of units of the good (or service) produced, and variable costs, which vary depending on the number of units of the good (or service) produced. Fixed costs include rent, insurance premiums, depreciation on plant and equipment, and interest payments on bonds, to name a few. Variable Costs include wages of production workers, fuel, electricity, cost of material(s), and transportation. The Total Cost is the sum of all fixed and variable costs. And the how depends upon what option has the lowest total cost. Is it cheaper to produce the goods yourself, outsource to a third party (taking into account transportation and a profit margin for the outsourced producer), or produce the goods in a joint partnership with (one or more) manufacturer(s), where one party produces some of the components and another assembles them, for example. In basic modern economic theory, the answer is the option with the lowest cost.

And this concludes our introduction to the basics of economics for Supply Management, as we have now answered the three basic questions. But this isn’t the end. It’s only the beginning. First of all, since the answer for so many companies these days is to outsource, we have to understand the economics behind outsourcing so that a company can do a proper total cost analysis and make the right decision. But even more important, the value of an enterprise today is not measured solely on revenue, it’s measured on non-revenue producing components that are assigned a monetary value (such as brand equity, IP, etc.). After a hiatus, we’ll examine these issues and some of the economic theory that (in theory) underlies these decisions.