Category Archives: Market Intelligence

What Should Drive PE Investment?

The M&A frenzy cycle that we have been discussing on and off for the past year hasn’t really died down, and this has spurred the PE cycle where PE (Private Equity) firms, wanting to capitalize on the frenzy around the Procurement space, are buying (majority investments in) vendors (that appear) ripe for a turn-around or market growth with just a little boost to their platform.

By investing in the right platforms, PE forms are looking to acquire vendors that they can flip (public or private to a bigger PE firm or bigger software vendor) before the M&A frenzy dies down. But just buying any old firm — regardless of how good the turn-around opportunity looks, how good the base technology platform is, or how much the vendor’s platform can be improved with additional investment or roll-up acquisitions — isn’t the answer.

Nor should the vendor follow the same rules that companies should follow when doing M&A. What should a P&E firm look for?

Operations

The firm should either have an efficient operational model or the P&E firm should be able to make the model efficient. If overheads are too high, there should be a way to bring them down quickly — either through new leasing arrangements, new (data center) hosting arrangements, cheaper back-office support operations (using PE personnel or outsourced providers for non-critical operations, etc.).

Talent

Whether the goal is a turn-around, an improved platform, or just taking the platform to a wider market, that’s going to take talent. The majority of the core talent that built the solution and the core talent that can take it to market, sell it, and implement it should still be at the company. Otherwise, it might be a better investment to build something from scratch.

Portfolio Synergy

Whether it’s turnaround or a growth strategy through an improved platform, there typically needs to be results within a few years. The best way to make this happen is if the solution has synergy with the customer base in the rest of the portfolio. For example, if the solution being considered is an indirect sourcing platform but most of the customers in the PE firms stable of companies are direct sourcing manufacturers, the PE firm will have zero advantage in trying to take the solution to market.

Just like M&A vendors should not pursue mergers or acquisitions that get synergy from redundancy, PE firms should not pursue acquisitions that just look cost effective. Only those investments in firms with solid platforms, good talent, efficient operations, and and an attractiveness to the markets they know are worthwhile, as those are the only companies with near-term growth potential — and the only companies the market will want to consider.

Hopefully PE firms will take this advice and save/grow those companies that will help the market as a whole. Only time will tell.

How Do You Find Hidden Costs? Part II

Last year we noted that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them. Sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin. But the margin is only one hidden cost.

There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find the hidden costs. All of them.

In our last post we noted that one way to find hidden costs was to look at production costs, particularly:

  • raw materials
  • energy
  • labour
  • overhead costs

But, as noted in our opening paragraph, there are also hidden costs in the transportation of the goods. And hidden costs in the costs associated in the transportation of the goods — which can include interim storage, dock / port fees, extra tariffs, etc. And what costs are hidden?

  • Fuel Surcharges
    yes, these are valid if there is a contract that allows them, but if the contract is well written, they are supposed to be in line with actual fuel cost increases and decreases above a maximum cost … typically what will happen is suppliers will raise when fuel prices go up, but NOT decrease when they fall back down – that’s unnecessary hidden cost
  • Interim Storage
    some suppliers will use shippers that do a lot of cross-docking, especially with LTL, and some might even temporarily store goods to make sure they only run trucks full – this can incur storage costs and even delivery delays — if the combined costs of this intermediate storage and delay to your supply chain is more than just shipping a LTL truck direct, that’s a hidden cost
  • Dock/Port Fees
    sometimes a supplier or shipper will always blindly use the closest port, even if a port a couple of hundred miles away has half the fees and has carriers that cost less — this is also a hidden cost — remembering that the busy ports are always near capacity, the difference can often make trucking the goods an extra couple of hundred miles a profitable venture
  • Extra Tariffs
    if you are buying from a supplier that has multiple locations in Asia, which one they manufacture in and ship from matters greatly as export tariffs differ by country and import tariffs greatly differ by country; if the right location isn’t chosen based on the destination, these are extra hidden costs as well

Supply chains are fraught with hidden costs, and while it could take a lot of analysis to find out how much they are costing you and whether they are worth dealing with, the reality is that a lot of them are not that hard to find if you just trace what happens from finished good back to raw material.

Happy tracing!

Supply Market Intelligence … Harder than it Looks … But Possible with Modern Systems, Part II

See Part I for the story to date. Suffice to say that when the following are objectively analyzed, one can expect good market insights:

  • financial statements, particularly those from public companies (as false statements are a criminal offence for the CFO and CEO in some countries)
  • customer interviews, good or bad, as it’s a third party product/service view
  • performance reporting, as any hard metric is objective
  • internal stakeholder interviews, where the bias is minimized through targeted questions
  • price index data, that can be used to roll-your-own forecasts
  • public consumption data from government contracts, as they are great benchmarks

… provided one has the right platforms!

What are those platforms? Well, consider that the following sources are (primarily) numeric:

  • price index data
  • performance metrics
  • public price contracts

And the following sources are primarily (subjective) textual:

  • customer interviews
  • stakeholder interviews

And the following, final source is mixed:

  • financial statements

And that makes it pretty clear you need a platform that has the following if you want to process the price data:

  • A Great Open API
    as the price index data will be on multiple exchanges — which use different APIs, security protocols, currencies, and even data encoding formats and you will need to be able to easily retrieve and integrate all of it
  • Multi-Level Formula Based Cost Models
    to accurately capture and represent all of the commodity, component, product, and service costs that you need to track for cost estimation and analysis, bill of materials, sourcing, etc.
  • Powerful Analytics (Integration)
    you need to be able to store, analyze over time, and use multiple, multi-variate, statistical algorithms to detect trends and project them over time, as well as alter the assumptions, parameters, and model inflection points (due to predicted inflection events)

… and a platform that supports the following if you want to process the textual data:

  • advanced semantic processing
    that can extract key topics and opinions and classify them to process or technology, functional area, etc. (as well as identify incongruities)
  • advanced textual analytics
    the platform needs to be able to assign general descriptions numeric weights against important factors (perceived risk, customer service level, etc.) to determine if the general view is improving, weakening, or staying static
  • advanced sentiment analysis
    that can extract not only general opinions about a supplier, process, etc. but specific opinions about process, technology, etc. components — for example, the stakeholder might be soured on the relationship with a supplier because they have p!ss-p00r customer service but agree they make the highest quality parts (and would be usable if they ever bothered to answer the d@mn phone); just an overall negative sentiment of 0.6 is not that meaningful

… and to process financial statements, the platform needs to merge the advanced textual analytics to populate a standard financial model template, adding in any additional revenue or expense, asset or liability, etc. lines that are missing from the standard model so the books balance and can be analyzed.

So where do you find these capabilities today?

Well, as previously indicated, you will find:

  • advanced cost models in direct sourcing platforms that support full multi-level bill of materials
  • advanced forecasting in modern analytics platforms that support machine learning
  • advanced sourcing support given predictive costs in platforms that support strategic sourcing decision optimization
  • advanced document analysis in industry leading contract management solutions (which can be adapted to parse and analyze and break apart and score any document type given a template and samples)

In other words, modern Analytics, Optimization, and Contract Analytics solutions. And this is just another reason SI has been preaching advanced optimization and analytics since day 1.

Supply Market Intelligence … Harder than it Looks … But Possible with Modern Systems, Part I

Last year, about this time, we wrote a piece on Supply Market Intelligence and how it was Harder Than it Looks because there are a number of sources that might yield intelligence, including:

  • Suppliers,
  • Internal Sources, such as
    • internal stakeholders
    • performance reports
    • SRM programs
  • External Sources, such as
    • news feeds and alerts
    • price index forecasts
    • blogs and social media
    • peer companies
    • research services
    • advisory programs

… but not all are equal. And not all are fully accurate. For example:

  • Supplier company websites only show you what the supplier wants you to see, which is typically not the full picture, and maybe not even a true part of it
  • Internal Sources, such as
    • internal stakeholder interviews capture bias as well as expertise
    • performance reporting can only report on hard metrics the organization had the foresight to capture
    • SRM programs — and the insights yielded — vary by company and supplier
  • External Sources, such as
    • news feeds only cover the stories that interest the journalists
    • price index forecasts use in-house algorithms that are not disclosed that may not be accurate
    • blogs and social media cover the stories that can be sussed out by the bloggers and analysts

But some of them contain valuable data that when appropriately, and objectively analyzed, can yield good insights, as per our follow up post:

  • financial statements, particularly those from public companies (as false statements are a criminal offence for the CFO and CEO in some countries)
  • customer interviews, good or bad, as it’s a third party product/service view
  • performance reporting, as any hard metric is objective
  • internal stakeholder interviews, where the bias is minimized through targeted questions
  • price index data, that can be used to roll-your-own forecasts
  • public consumption data from government contracts, as they are great benchmarks

… and so on. But it can be pretty hard to make sense of all this … unless you have the right platform with the right capabilities. Now, it might not be a single platform from a single vendor and instead be a base Sourcing / Procurement platform augmented with multiple best of breed modules and API services from multiple vendors, and that’s fine. The point is that it’s possible to make sense of this with modern technology. What technology? How? That’s the subject of our next post.

The Key to Successful Supply Management? No MoBAs, no PiMPs, no Paper Pushers, and no over-reliance on dumb bots.

It seems the list gets longer every year as those looking for a quick-fix try to take shortcuts to solving their problem that involve pushing those problems to third parties who are even less competent to solve them.

A few years ago we said the key for a successful supply management center of excellence was no M(o)BAs and no P(i)MPs!. This is because successful supply management relies on supply management expertise and experience, not on meaningless business models and knowledge-free project management frameworks. (Remember that SI still firmly believes that individuals that only have MBAs are just Master of Business Annihilation!)

This is because not only is it the case that you can’t manage what you can’t understand, but all you can do if you try is make it worse! Supply Managers are overworked and under-resourced, and any misstep has a ripple effect throughout the supply chain — one that can go from a minor delay to a major catastrophe. Management knowledge and project management skills are good things, but whereas supply chain is concerned, only if this knowledge and skill is added to a fundamental understanding of the supply management process that needs to be performed.

However, as we indicated last year in our post that The Key to Successful Supply Management? No MoBAs, no PiMPs, and no Paper Pushers!, simply eliminating the unknowledgeable MoBAs and PiMPs is not enough anymore. Paper pushers have to go to. There’s no time for tactical people who only receive, process, and send e-paper in a modern fast moving supply chain when the majority of this work can be automated by modern bots.

Today’s professionals need to be able to identify, implement, and make use of modern assisted and augmented intelligence solutions that can help them identify what needs to be analyzed, what needs to be addressed, what needs to be done, and the best ways to potentially go about it. The individuals who can do this are not PO paper pushers or AP invoice processors. They are knowledgeable and capable sourcing, procurement, and supply management experts who know their domain, and the tools, first and the business and project management second.

And they can’t be hampered by dumb bots. Dumb bots do poor invoice matching and create a lot of false positives to be unnecessarily checked. Dumb bots simply flag differentials between current and market price with no understanding of what the cause for the difference is and whether or not savings could actually be realized if a sourcing event was conducted. Dumb bots automate auction and RFX stages on a schedule, but don’t ensure that stages are complete or requirements are met. Dumb bots can extract potential terms, costs, etc. but make no sense of them and not even classify them properly. And so on.

Smart bots are needed, but dumb bots create more tactical work than they take away. So make sure they go with the paper pushers when you show them the door.