Category Archives: Market Intelligence

How do you explain the importance of Procurement to a CFO or CEO?

O’er on Spend Matters UK, the public defender does a great job of figuring out how we would explain Procurement to a (hyper-intelligent) alien race who has no concept of what it is or why it is needed in his post on back to procurement basics – explaining to an alien, which is a must read, but I don’t think that would ever be a problem.

Any alien race smart enough to build and pilot spaceships that can exceed the speed of light and traverse vast distances to get from where they are to where we are in a lifespan would obviously be smart enough to understand why beings of lesser intellect have to specialize to do well, and that these beings of lesser intellect would have to work together, and come up with a system (the corporate world) to allow that, as flawed as it may be. They’d get it.

Our real problem is explaining the importance of Procurement to an old-school CEO who still thinks success is all about sales (and marketing to pave the way) and a CFO who thinks success is all about cost control, especially internal, and trying to pay peanuts rather than wages and rates that would incentivize someone to success.

I challenge the public defender to come up with an explanation that an average old-school CEO who only ever studied operations and came up through (Sales or Marketing) Management or traditional Finance would not only understand, but understand to the point that he (let’s face reality, these narrow-minded CEOs are usually male) would embrace Procurement and the value-based vision we run off of.

Bonus points if it changes the viewpoint of someone who graduated Trump University.

What is Visibility?

This is a term that has been overused and abused by Supply Management vendors for years who like to claim that their tool will give you unprecedented visibility into your supply chain, but just what does that mean? If you look up the definition, the first (or second) definition you’ll find in many dictionaries is something along the lines of the state or fact of being visible, which isn’t very useful when visible is defined as that [which] can be seen. So what do we have to see?

Well, if you talk to many vendors, you have to see the data is. Specifically, the vendor might tell you that you need to see the data on where your order is in terms of production, shipment, or delivery. And this is good, but it’s not enough. While this will tell you that production on an order is three (3) days behind, it won’t tell you why. Is the plant recovering from a backlog, and about to put your order into overtime production tomorrow? Are they suffering from a worker shortage, or strike, and your order is delayed another week? Or have the components and/or raw materials not yet arrived? And if it’s the latter situation, why? Is it a transportation delay? A production delay? Or a raw material shortage that may take months to correct? So you need visibility into the status of your order and all of your supplier’s orders that impact your orders. But this isn’t always enough.

While it would be great to know as soon as a delay occurs that could potentially impact your supply chain, and give you more time to respond and potentially create and/or implement mitigations and counter-measures (such as finding an alternate source of supply or stepping in to help the supplier solve the problem), this still doesn’t give you any indication of problems that could be brewing.

That’s why other vendors try to sell you risk-focussed data solutions such as financial viability reports (from credit-based data) and activity reports (from import/export data). But these solutions only allow you to judge supplier viability, they don’t allow you to determine if an external event in the supplier’s locale (such as war breaking out or a likely natural disaster) could take the supplier out even if they are financially viable and low-risk from a business perspective.

So other solutions try to sell you country-based risk assessment solutions with data on each of the locales you are doing business with. And this is a type of visibility. As are sustainability tracking solutions which track sustainability data (with regards to environmental, legislative, and other types of compliance data) to try and predict current and future supplier health based upon a sustainability score that goes beyond pure financial data. And this is another type of visibility.

But then not only do you really need to understand your current costs, but your potential costs when doing a Sourcing event, based on current market rates and expected currency fluctuations and transportation costs over the contract term. It’s also important to know not only current tariffs and taxes, but any proposed changes and the rate of change associated with those tariffs and taxes. Some countries (like Brazil) will change import rates across categories almost weekly. Others will only change once a year or when new trade agreements are struck.

And you need to see usage. If you bought a solution for the entire sourcing department, is the entire team using it? How often? And how does that compare to how often they could be using it? If 30 categories should be put out to bid over the course of a year, but only 20 are, why? Is it because a couple of users are still giving contracts to incumbent vendors without proper bids? Is it because the old curmudgeon thinks his 3-bids-and-a-buy spreadsheet approach is superior? Is it because the tool makes it so damn difficult to create an RFX with all the necessary attachments (because your sourcing 100 line item bill of materials where each line needs its own specification attachments and the buyer has to upload them one by one) that the team only has time to do 20 categories? You need to know.

And if you had all these solutions, you could certainly argue that you had supply chain visibility, but the question is, how complete is it? The reality is that you only have data visibility, and while that’s a great start, supply chains don’t run on data alone. They also run on processes … processes used to plan the supply chains, manage the supply chains, and correct them when things go wrong. How much visibility do these solutions give you into your processes?

Think of your average sourcing, procurement, and even BoB Source-to-Pay platforms. How many of them have the ability to even design basic project management templates with workflows, milestones, approval chains, party, and counter-party obligation requirements that give you the ability to plan, track, and maintain visibility through the entire process? There’s the market research, the sourcing, the contract negotiation and lifecycle management, the supplier relationship management and development, the day to day procurement, the inventory management and replenishment, the MRO, and so on that needs to be done, process oriented, day to day. And you need visibility into that too!

And, even if you have all of the data and process visibility described above, is it enough? How much do you need to see to be confident that the chances of an unpredicted event are sufficiently low and/or the chances of you not knowing about an unpredictable event soon enough to implement mitigations are sufficiently low? It’s hard to say. It probably depends upon your operation, your risk exposure, and the strength of your supply chain and supplier relationships. But it is safe to say you need a significant amount of visibility, and that you should starting figuring out what that is today.

Pay the Piper on Time or Pay the Price!

In response to abysmal payment terms of 120 days or more, which were seriously crippling smaller suppliers, the UK has instituted a requirement for large businesses to report on their UK payment practices twice a year, with failure to do so a criminal offence with unlimited fines. The goal is that the mandatory reporting requirement, which requires companies to report on the average time it takes to pay invoices for the majority of contracts (0-30 days, 31-60 days, and 61+ days), will encourage businesses to improve their payment practices as a result of transparency and public scrutiny.

It’s a shame that this requirement only exists in the UK, because not only should you know, and be prepared to report on, how fast you are paying your suppliers, but you should be striving to pay all of your suppliers within 30 days of receipt of a valid invoice, because your success depends on their success, and while a happy supplier, like the pied piper, will catch and lead the supply chain problem rats away, an unhappy one will allow those problem rats to multiply, and possibly even aid in their reproduction and spreading.

Suppliers are critical to your success. They not only provide the raw materials, products, and services you need, but often the raw materials, products, and services your customers need — and if these raw materials, products, and/or services are not of high quality, delivered timely, and supported enthusiastically, your customers will not be happy. Unhappy customers, especially those not under or nearing the end of their contracts, tend to defect.

A supplier is only likely to provide high quality, supported, timely products and services if it is happy. And believe the doctor when he tells you that a supplier will NOT be happy if that supplier is not paid on a relatively timely basis most of the time. Like you, suppliers need predictable cashflow and if you give them a cashflow nightmare, they will not be too concerned about giving you an inventory forecasting or customer satisfaction nightmare.

So don’t rely on a forthcoming guidance or industry initiative to tell you when to pay the piper. Just pay the piper and reap the benefits. (And if you not only pay on time, but pay early, you’ll be a customer of choice, and those customers tend to get all the benefits.)

The M&A Mania Ain’t Over Yet … But …


 

With one hand, pick up your copy of The Hitchhiker’s Guide to the Galaxy, with your other hand grab a Pan Galactic Gargle Blaster, have a seat, and read a few random entries while you have a nice relaxing drink. And definitely don’t panic.

In fact, don’t even give the acquisition a second thought right now. Why? The reality is that, for at least six months, nothing is going to change and you don’t have anything to worry about in the short term. First of all, takes a while for companies to figure out whether they are going to keep the tech, and then if they are going to merge it or keep it separate. Secondly, what to do with the teams. How they integrate (and who stays and who goes) and work together. Then the offices need to be harmonized. Etc.

Now, it’s a very real possibility that the company might have bought your provider just to squash the competition and/or try to get you as a customer, and that’s okay, because not only will it not happen overnight, but if you’re doing your job, you’re (re)evaluating your solution options at least once a year (before budget season) to not only identify what you are missing, but whether or not your current tech is still up to snuff. So, if the worst happens, or looks like it will happen, you already know who your likely options are and can start that RFP process.

Plus, if a company is paying 10, 20, 40, 100 million for another company, they probably don’t want to lose you as a customer (as they can’t afford to lose anyone at those prices for a few years), so even if their plan is to kill the technology and move you onto their platform (which will, hopefully be better … by the time they try to do so), they’re not going to force you overnight … they will honour your contract (which you signed and ensured had a change of ownership clause to your liking, right) and likely present you with a long term plan.

In other words, you have time to figure things out, and, to be honest, you should be moving much faster than the vendor anyway. So take another sip of that Pan Galactic Gargle Blaster and don’t panic!

Bigger. Badder. Baffling.

As per our previous posts, the merger and acquisition cycle is peaking. Coupa went on a spending spree and bought Spend 360 and Trade Extensions. Jaggaer merged with Pool4Tool. OpenText is acquiring Covisint Corporation. And Descarte Systems acquired PCSTrac Business. And we just know more announcements are coming.

Everyone is getting bigger and badder, at the expense of BoB (whose days appear numbered), and it’s getting a bit baffling. Some of the acquisitions make a lot of sense (at least on paper) with companies trying to flesh out suites, but some like Open Text’s acquisition of Covisint (which is very vertically focussed on automotive) are stretching a bit. But what’s most baffling with the rapid pace of acquisitions are how the companies are going to manage integrations (of platform and strategy) and solution footprint.

When you get big, things can get costly … quick, especially if there are multiple platforms involved. This isn’t good for you from a market perspective (as the size of the customer base that can afford your baseline solutions will shrink), and it isn’t good from an operations perspective. There’s a reason that Oracle expected to save a Billion in operating costs by acquiring Sun, and a lot of it came down to platform. Sun Microsystems was very efficient in its software infrastructure, running almost 1,000 different systems whereas Oracle, which ate its own “one instance dog-food”, ran one Oracle instance. By migrating all of Sun’s systems into one, it saves hundreds of million a year (at least 250 to 300 by some counts, more by others). If a company has six different platforms to maintain, that’s six different hardware infrastructure costs, six different software infrastructure costs, six different dedicated support team costs, six different implementation expert team (who will implement and train third parties) costs, and so on. These costs add up. Rapidly.

And they escalate the platform costs that the companies need to charge to customers, which shrinks the perspective customer base. And if the mid-market gets squeezed out, everybody hurts as the greatest number of companies without decent Supply Management solutions (and the bulk of the 40% who don’t have solutions) are in the mid-market. So while acquisition makes sense to fill a hole, not working on ways to integrate, or at least harmonize, the solution (so that there is no duplicate development across products or unnecessary, and costly, integration efforts) can be costly. So, in some sense, the speed at which some companies are moving is a bit baffling, as good integration takes good analysis, planning, and development — all of which takes time. Given that some acquisitions are being completed in two months, and that the amount of information that can be extracted in due diligence is limited, there’s no way the average company can begin integration out of the gate. In many cases, the acquiring company (that are experts in a different technology and business process) won’t even know where to start.

In other words, while some companies might be on the right track, they are just beginning a very long journey and have thousands of miles to go before they reach their destinations. Adding acquisitions adds miles to the track — miles that have to be travelled. The question now is not do they have the vision, but how will they get there. And that can be a baffling question for anyone to answer (especially without third party expertise and guidance). But not necessarily unresolvable …

In the interim, Spend Matters has been putting together decent guides on questions to ask your providers if they were involved in one of the covered acquisitions. Check them out. And answer the questions for yourself before committing.