Category Archives: Market Intelligence

e-Procurement Benefits – What’s the ROI? Part I …

In our last post we provided an overview of the big benefits of e-Procurement systems, namely:

  • on-contract spend
  • market costs
  • one-off spend approvals

These are valuable benefits, and the reasons that many organizations claim big, multi-million dollar savings from their e-Procurement system. But are these the system? Or the process? And, the most important question, what’s the ROI? Remember, big P2P installations can run your organization a million dollars — or more — up front and millions more over the years.

At a high level, the ROI calculation is easy. The system costs 1M, but saves you 5M, so it’s a 5X ROI. Right? Well, if all 1M is the result of the system. But chances are, only a small fraction of that is the system.  But even if we attribute all 100% to the system, is it really the system.   Or is it just because you have a system.

Let’s start with on-contract spend. If before the system was installed the organization had a 65% on-contract spend rate and after the system was installed the organization has a 90% on-contract spend rate, then the system boosted on-contract spend by 25%. If this resulted in a 2M savings, 40% of the 5M savings is due to this boost. This also means that 40% of the cost can be attributed to the on-contract spend potential.

Let’s move to market costs. If the system reduces off-contract spend by 1M on average over what was 20M of market spot-buys, then the organization improves spot buy spend by 5%. And since this is 20% of the 5M savings, 20% of the cost can be attributed to this savings.

Finally, let’s end with one-off spend approvals. Let’s say the organization does a lot of big asset rentals and purchases and they are typically done whatever way the individual wants. But lets say the standardized approach supported by the system allows the organization to reduce costs by 20% on the 10 M+ they spend annually, then another 40% of the big savings is due to this ability and 40% of the cost is attributable to this capability.

In other words, the organization is paying 400K to increase on contract spend 25% and save 2M, 400K to save on one-off spend approvals and processes to save 2M, and 200K to take advantage of market cost data to save another 1M. At this point, you’re probably saying, so what? It’s still a 5X return any way that it’s broken down. And you’re right.

But what if an organization can acquire all the market cost data it needs from a subscription to a commodity price consolidation service that costs 50K a year? Is the 1M system worth it then? Especially since the amortized cost for what the organization is using is effectively 200K? Is it worth sacrificing a 20X return for a bit of convenience?

And if the organization just needs a better RFP process with embedded collaboration to reduce those one-off spend approvals by 1,600K, and that better process can be obtained from a simple e-Negotiation platform for a mere 50K a year, instead of 400K, the organization is sacrificing a 32X return for a bit of convenience. Is that worth it?

And if the on-contract spend can be increased by 20% with a simple best-of-breed catalog solution which can also be acquired for about 50K a year from a leading provider, then the organization could save another 1.6M for 50K, another 32X return.

In other words, the organization could acquire 3 basic systems for 30% of the cost and see 80% of the return for a 28X ROI. So why spend 1M on a complete S2P suite?

Category Management: Getting it Right is Key to Surviving the Trade Wars Part III

The Trade Wars are here! Tariffs! Counter-Tariffs! Counter-Counter-Tariffs! Counter-Counter-Counter-Tariffs! Even online traders can’t trade that fast. It’s dizzying.

And if you’re planning didn’t start weeks ago, you have a lot of catching up to do. Because if you don’t, your business may not survive. Literally.

So far, we told you it was critical to:

    1. 1. Understanding your Current Costs in Detail
    1. 2. Understand your Tier 2 Supply Chain in Detail
    1. 3. Start By Identifying Alternative Supply Choices
    1. 4. Then Build Alternative Cost Models Around those Alternative Supply Choices

5. Re-Evaluate on Every Tariff Change

But this is not always enough. What if the majority of the rare earth metal comes from China and the cost is insurmountable for your business? You also need to:


6. Start looking at alternative designs that eliminate dependence on a single country.

You can’t be dependent on China, the EU, or any other locale that Trump is targeting. Costs could go through the roof.

Also, you can’t be dependent on certain transportation methods. If diesel costs go through the roof, long haul shipping is going to get considerably more expensive. It may actually be cheaper to do short-haul trucking from Mexico or Brazil if you’re selling in the US because you know that the US may subsidize your industry in other ways (with lower taxes or rebates for buying / shipping at home). Thus, you also need to


7. Start looking aggressively at near-shoring.

SI has been telling you for years that sometimes the best cost county sourcing is home country sourcing, and when that’s not viable, near-shore sourcing is becoming a better option again. Find alternative suppliers closer to home, just in case!

And, you better make sure their supply chains are secure.


8. Weed out near-shore suppliers that are actually getting most of their materials or doing most of their production remotely.

Remember, the entire point of trying to bring production closer to home to ensure affordable supply is to actually bring production back, not just source from a supplier that is just an intermediary that outsources on your behalf. That actually adds more time, risk, and cost to the supply chain.

Is this everything you can do? No, but it’s progress.

Category Management: Getting it Right is Key to Surviving the Trade Wars

The Trade Wars are coming. The Trump Tariffs are coming fast and furious, and the rest of the world is retaliating. So if you aren’t prepared, just about every category under your purview is about to get a LOT more expensive. A LOT more.

And while you’re not likely to thrive, because no one wins a ware, and no one comes out unscathed, you can survive — with care and planning. So what do you need to do?

1) Understand your Current Costs in Detail

Build detailed total cost of ownership cost models for all of your significant (cost/volume) or strategic purchases as if they direct purchases. The costs should be broken down into the components and raw materials that constitute at least 80% of the material cost, and, if possible, energy and labour costs should be broken out of the overheads. Done right, when you add in the “fair” margin, you have the expected unit cost.

On top of this, you add in the transportation costs, surcharges, non-recoverable taxes, import & export charges from source to sink countries, and defect/waste costs.

And this is why we noted you needed talent that could do modelling and use platforms that could handle it is important. But this is just the start. Sometimes the tariffs will be imposed on the product level, but sometimes on the material level. So, that’s why you have to …

2) Understand your Tier 2 Supply Chain in Detail

It’s not just what you’re buying and where you are buying it from, it’s what your suppliers are buying and where they are buying it from. If you’re buying your assemblies from Germany, and 15% tariffs get smacked on assembly imports, that’s a 15% increase. But that’s not the only increase you could be subject too. Maybe Germany is buying the bulk of the raw materials from China. What if Germany decides to smack 15% to 20% tariffs on almost all of the raw materials being sourced from China? Which constitute 60% of your supplier’s costs? Then their costs will go up 9% or more, and guess what’s going to happen to your costs? They’re going to go up another 9%. And you won’t know it until you get the bill!

But if you understand your Tier 2 supply chain you can know when your suppliers are going to get hit with new tariffs, and when they are going to pass on those tariffs to you. You can proactively question them if they are going to switch suppliers, and work with them to find alternative sources of supply without tariffs, or which have a lower overall total cost of acquisition than the sources of supply they are using now.

And this is why we noted you needed talent that had commodity market expertise and negotiation capability as well as a platform that could integrate real-time market data (including tariff changes) and supplier performance management.

But this is just the beginning!

Stay tuned!

Category Management: Getting it Right

As we have posted regularly, the first step is to solve the classic Triple T problem:

  • Talent
    your organization must have the right talent to properly manage your category-based initiatives
  • Technology
    your organization must have the right platforms to capture the right data and support the right processes
  • Transition Management
    your organizations must have the right processes in place to handle the necessary organizational shift to properly manage the initiatives as markets, needs, and workflows will change over time

Only once the talent, technology, and transition management is in place, will the organization have what it takes to fully embrace the initiative. And do it right. At some point we will revisit each of these requirements in more detail, but today we’re going to outline what these requirements are at a high level so that we can dive into a few key aspects that are important with the looming Trade Wars on the horizon.

So, at a high level, where should your Supply Management Organization start? By focussing on the core capabilities that are required in each “T” category, many of which we are outlining in this post. And, more importantly, finding the right talent, technology, and transition management plan that fits.

Talent for Category Management

Good category managers need at least the following hard and soft skills:

  • Analysis
    to determine the volume and spend in the category
  • Modelling
    to determine the major cost components, and cost drivers, of the major products or services in the category
  • Commodity Market Expertise
    in the major raw materials and commodities used in the production of the major products in the category
  • Stakeholder Management
    as savings and performance improvement will usually come from consolidating related items with a smaller set of suppliers, which is going to ruffle some feathers when some departments lose their coveted suppliers and supply relationships.
  • Negotiation
    since not only will the individual need to consolidate a set of commodity purchases with a single supplier, but the individual will also need to cut a good deal and maybe even convince the supplier to take some business it normally wouldn’t want
  • Change Management
    since good category management typically requires changing the way the organization conducts business today

Technology for Category Management

Appropriate technology platforms for category management will have at least the following features:

  • Spend Analytics
    with extensive aggregation, cubing, and filtering capability
    as the category manager needs to not only extract volume and spend, but identify related products and services based on components, raw-materials, and sub/related services
  • Should Cost Modelling
    which allows the category manager to understand not only what the product should cost but the primary cost components and the appropriate inputs to an optimization model
  • (Real-Time) Market Data
    which allows the category manager to track historical market trends and predict future prices to time the market if prices are volatile
  • Supplier Performance Management
    which allows the category manager to track and manage supplier performance
  • RFX
    to manage the data collection and track supplier bids and responses before and during negotiations

Transition to Category Management

In order to transition to proper category management, the organization needs to hire someone with good change management skills and give that person the tools he or she needs to get it done. That person also needs to be a natural born leader and someone who can work with teams to get it done. Then, that person needs to identify a change management methodology and adapt it to organizational needs. And, most importantly, get buy in using the aforementioned natural born leader and workforce harmonization skills.

This isn’t a complete (laundry) list of what is required for successful category management, but it’s a good starting point. Get the right talent, technology, and transition management in place, and your organization will be well on its way to category management success. More details to come! Especially with respect to the looming trade war!

Maybe It’s Time You Go Direct … Part I

Most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings (as most of these organizations spent all their time and effort on direct sourcing). Why? These were typically the least well managed, and the most bloated, categories and simply inviting more suppliers, who had to complete a pre-defined RFX that allowed for apples-to-apples comparisons, pushed prices down, and if the market conditions were right, auctions pushed prices down further and it was not uncommon to find a number of categories where 20%, 30%, or even 40% savings could be found during the first event simply by squeezing the unnecessary fat out of the margins.

But this is the very reason why the first generation sourcing platforms boomed and busted, and why auctions rose and fell in an average organization during the noughts. The organization would save a huge amount the first auction, typically at least 15%. They’d then save a respectable amount during the next auction, say 5%, because all the suppliers came back with their pencils sharpened ahead of time. But the third auction would fail miserably, and most of the time prices would increase. Once all the fat is squeezed out of the margin, competitive RFX or auction will not save any more and, in fact, over time, inflation will creep in, the supply/demand imbalance will shift, and, without something new, costs will rise.

The next step, if the organization is analytical, is generally to bring in analytics, identify the categories with the best opportunities due to market price trends, supply/demand imbalance, or sheer volume leverage the organization had. Careful picking, even if the category was sourced twice, or thrice, before will still lead to some savings. At least once.

And when those savings run out, then you look at optimizing TCO when all costs, discounts, transportation costs, discounts, and associated lifecycle costs are modelled. You build your risk mitigation rules and by splitting the award, choosing the carriers and lanes carefully, and just being smart, more savings materialize. Typically over a few events as your volume leverage increases, your sophistication improves, and your events get bigger.

But there’s always another brick in the wall, and you’re always going to hit it. Unless you go direct. Why? Guess you just have to come back for Part II!