Category Archives: Market Intelligence

If You Do Not Get Sustainable Results, Blame Yourself!

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It’s deja vu all over again!

Robert Rudzki is not the only blogger and consultant to recently hear that a potential client had, just a few years ago, hired a large consulting firm to do a high-profile “strategic sourcing program” with nothing sustainable to show for it, as he indicated in his recent SCMR blog post on Deja vu all over again. I’ve heard the same sentiments echoed to me by a number of consultants at a number of small and mid-size niche and specialty services and software providers in the e-Sourcing & Supply Management space in recent months.

It would appear that a common trend last time money flowed into laggard Supply Management organizations before the recent downturn was to simply hire a Big-X consulting firm to fast track the organization to strategic sourcing success. While this is a great way to fast-track a project, and a contract, that is expected to result in significant savings, the only thing that is fast-tracked from a finance perspective is payment to the consulting firm that runs all the way to the bank! As leading Supply Management professionals know, a contract does not guarantee savings. The only way to achieve savings is to execute against the contract and make sure savings are realized. Just because you have a new contract that allows you to source widgets at $8 a pop, instead of $10 a pop, this doesn’t mean you are going to save $200,000 on your annual purchase of 100,000 widgets. For the savings to materialize, all of the following has to happen:

  • the buyer has to place the order with the contract supplier
  • within the contracted lead-time and the supplier
  • has to ship on time
  • using the approved carrier and shipping arrangement
  • and pay all required third party and government export fees
  • and file all appropriate paperwork at the same time your organization, or a 3PL acting on your behalf,
  • files all of the appropriate import and compliance paperwork
  • and pays any associated duties to make sure that
  • the product arrives at the warehouse when its supposed to
  • where it is received, inventoried, and appropriately stored which results in
  • an invoice being accepted and verified against the contracted rates and
  • paid at the appropriate time only when all goods are received and verified as acceptable.

Simply put, if

  • the order is placed with the wrong supplier
  • or placed late and the order has to be expedited
  • or shipped late and a different shipping method has to be used
  • or export documents are not filed on time
  • or fees are not paid and fines are issued
  • or import documents are not filed on time
  • or taxes are not paid and fines are issued
  • or the product is not properly inventoried or stored and can’t be found and unnecessary replacements
    need to be ordered
  • or the invoice is not verified and the old rate is still being charged
  • or the invoice is paid late and a penalty is applied

then those (significant) savings negotiated on your behalf go out the window. And you’re not going to get them back! First of all, once they’re gone, they’re gone. Secondly, because you weren’t actively involved in the project and didn’t insure that the knowledge that you required to achieve a sustainable transformation was transferred, you’re not going to be able to keep costs down when you renegotiate the contract in this economy where supply is tightening and costs are rising. So you’ll pay even more, even if the rate should stay almost flat.

In order to get results, you have to work with the consultants to understand the strategic sourcing process, the strategies applicable to your organization, the goals of each individual project, the savings opportunities in each project, the key contract terms, the changes that need to be made to capture the savings and adhere to each
contract term, the key metrics, the measurements that need to be made regularly, and the warning signs that something is happening / has happened that could jeopardize the savings the organization expects. Failure to do any of this is a sure-fire way of making sure that nothing changes and that your organization continues to leave money on the table.

In short, if your organization continues to be one of those organizations that leaves up to 40% of the contract value on the table because you did not do all of the above, don’t blame the service provider unless you did all of the above. As Charles, Bill, and Bob said in their recent books on The Procurement Game Plan, Managing Indirect Spend, and Next Level Supply Management Excellence, success is your responsibility and you have to actively manage your service providers and make sure that the knowledge required for a sustainable transformation is transferred to you.

Did Descartes Miss the Point in Its List of Four Things You Can Do Today To Reduce Fuel Costs?

Given that Gas Prices are Too Damn High and that this situation is not about to change anytime in the near, and even not-so-near, future, a recent white paper by Descartes on “Reducing Fuel Costs”: Four Things You Need to Know and Can Act on Today caught my attention. However, while their suggestions are good, I think they kind of missed the point. Going straight to the section on What You Can Do Today, Descartes suggests that you should:

  • Decrease the Total Miles/Kilometers Driven by the Fleet
    Since the vast majority of fleets still drive inefficient routes to serve their customers, this is a good suggestion on the surface, but it’s easy to take this too far. For example, while the shortest route from Birmingham, Alabama to Indianapolis, Indiana might be straight through Nashville, Tennessee, driving through there at rush hour is not the best move as the trip could take an extra 3 hours and every hour the engine is running, gas is being consumed. This requires some smarts. Sometimes longer trips are more efficient.
  • Minimize Idling
    This is a great suggestion. Not only does this burn fuel, but it harms the environment. However, when a conscientious driver is idling, it’s not when he’s making a delivery, but when he’s waiting to make a left hand turn. The right routes don’t have left turns. That’s why UPS does it’s best to eliminate them. However, this can slightly lengthen a route, which is in conflict with the last suggestion.
  • Change Driver Behaviour
    If driver behaviour is a major cause for fuel inefficiency, then this is obviously a good thing, especially if the driver is excessively speeding (well beyond the fuel efficiency zone), (too) rapidly accelerating, and hard-braking on a regular basis. But the driver’s behaviour might not be entirely his fault — it could be a fault of your training program, which might be mentor-driven by your senior drivers who have had bad habits all of their driving career and pass them on. The first step should be to check your training programs and requirements and make sure your drivers get the right behaviour day one.
  • Implement regular maintenance monitoring plans.
    Vehicles with properly inflated tires, well maintained engines, and good braking systems do maintain less fuel, but don’t go overboard with preventative maintenance. An overly aggressive maintenance plan will replace parts needlessly and eat up the savings you get in decreased fuel utilization pretty quickly. Monitor aggressively, but maintain sparingly.

In other words, it’s suggestions for what you can do today were good, but not great. However, the section on how technology can help was much better. In this section, it made four recommendations, and three of them were on the money.

  • Route Planning and Optimization
    This optimizes the routes to balance minimum driving distance and minimum run time (by adding in right turns to reduce idling and slight detours to bypass commonly congested areas) across the fleet and, as the paper notes, can result in a reduction of total route length by 5% to 30% when done properly.
  • Mobile & Tracking Solutions
    This allows you to track your trucks and know the exact location of your drivers, the routes they have taken and, most importantly, how the fleet is performing against the plan.
  • Telematics
    A constant measurement of engine data and driver performance can allow engine problems to be identified immediately and bad drivers to be singled out for training to improve their performance.

The last recommendation, not so much. Basically, the paper recommended a cloud-based solution for all the standard reasons, but clearly forgot that the cloud is not a fluffy magic box and not all of the promised advantages will materialize.

If you track, measure, and optimize, you will minimize fuel requirements while improving performance, but no one tip is going to save you and over-simplifying the problem can cause as many problems as it solves. The only way to truly save fuel is to reduce delivery requirements. Do you need as much? Do you need it as often? Can you get the product from a geographically more proximate supplier at a comparable cost? These are the real questions you need to ask!

Procurement Game Plan: A Review Part III.3

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. And even more recently, SI began it’s detailed review, in three parts, of this new Procurement Guide. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, supplier relationship management, and success reporting. This post, which is the beginning of the end of our review, dives into techniques for improving Procurement performance and a few specialized areas of Procurement, as covered in the second last chapter of the text.

The authors define four main technologies for improving performance:

  • Procurement Outsourcing
    which is the shifting of some procurement tasks to an external organization
  • Group Purchasing Organizations
    are entities that are responsible for sourcing and managing aggregated contracts on behalf of a discrete group of companies
  • Procurement Cards (P-Cards)
    that allow organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses
  • Procurement Technology
    that includes e-Procurement and e-Sourcing and allows a buyer to take it to the next level

Since Procurement Outsourcing will likely be restricted to tactical functions if your goal is to create a first-rate strategic Procurement Organization, since GPOs primarily offer advantages only on categories where you just don’t have the volume or the manpower, and since proper coverage of the technologies you should be familiar with and using on a daily basis is a book in and of itself, we’re going to restrict our review of performance enhancing technologies to P-Cards.

Procurement Cards are a tool that can be adopted to reduce tactical activities as they negate the need for POs and simplify payment, which can be made by the buyer placing the order. If three-way match is used (which is the matching of a Purchase Order to an Invoice to a Receiving Record), it can reduce administrative costs as it negates the need for a separate invoice review and payment by accounts payable. Of course, on the other side of the coin, a P-Card can also increase the potential for fraud.

However, as the authors note, implementing P-Cards is not as simple as calling up your local merchant account provider. Due to the ease with which a user can pay for goods not received, overpay, or open the company up to fraud (by forgetting their card at their favourite restaurant), a number of decisions need to be made before the first card is issued. As per the text, some of these decisions include:

  • should there be one spending limit for all holders, spending limit by categories, or individualized limits by buyer?
  • are there limits by transaction, day, or month?
  • are any categories restricted? exempt?
  • who is eligible for a P-Card and who is not?
  • is the P-Card limited to purchases from approved suppliers?
  • what transaction information and reporting capabilities do you require?
  • which provider(s) can meet these requirements?

And these decisions need to be made in context of the advantages and disadvantages P-Cards can provide, which include:

Advantages

  • reduced cycle times which free up your staff to do strategic, instead of tactical, work
  • faster supplier payments which can reduce a supplier’s cost of capital if they have to borrow less (and, in turn, the cost they pass on to you)
  • extended payment terms (which do not impact your supplier as you owe the P-Card provider, not the supplier)
  • less maverick buying (if P-Cards are made mandatory for certain purchases and controls that restrict payment amounts and vendors are put in place)
  • better transaction data for your spend analysis
Disadvantages

  • increased chance of theft/fraud (as it’s just another credit card)
  • longer reconciliation time (if one payment is made for multiple invoices)
  • less budget visibility (as they track transactions, not budget)
  • another system to reconcile (if they are not made mandatory for certain classes of payments)
  • move maverick buying if controls are not well defined (as Homer can now order anything he wants from Mighty Office Express Supplies [MOES] if MOES is an approved vendor with no limit)

Implemented effectively, P-Cards can be a great tool. Implemented poorly, they can be your worst nightmare.

After a whirlwind tour of the technologies employed by leading Procurement organizations, which includes e-Procurement, e-Sourcing, and (Decision) Optimization (explained by the doctor in the Inefficiency Eliminator wiki-paper and the two-part Next Level Purchasing Podcast on Supply Chain Optimization [Part I and Part II, with transcript]), the book moves into a discussion of specialized areas of Procurement where special teams are important.

These areas include Global Sourcing, Procurement Outsourcing Provider (POP) and Global Purchasing Organization (GPO) management, services procurement, and inventory management. Since a discussion of each of these topics is a post in itself, and the discussion was quite dense, we’re just going to focus on a key element of success discussed in the penultimate chapter that many books miss — Project Management. As the authors note:

As organizations have grown globally, Procurement is called upon to unify everyone with a common buying strategy. This requires that a leader assemble a team and coordinate the efforts of subordinate Procurement staff, business unit representatives, and management. There are limited resources, goals, and timelines. Does this sound like the project management discipline? You bet it does!

Project management is an essential element of successful Procurement and every Procurement professional needs to be educated in Project Management methodology (which is why NLP has a course on Professional Purchasing Project Management). This section of the chapter discusses the project charter and its importance, project plans for simple projects, project plans for highly complex projects, and risk analysis — a key part of every project plan. This is a section of the text that everyone should read carefully — twice!

At this point, the reader should have a strong understanding of the basic knowledge required for Procurement success, be aware of her weaknesses, and have a plan to address them (such as through additional [online] training, certification, or mentoring). At this point she is ready to begin her career in the Procurement workplace and become a perennial all-star, which is the subject of the final chapter of the book and will be the subject of our final post.

To be concluded!

Some Takeaways from the E2Open sponsored SCM World Collaborative Execution Study

SCM World recently released a study on “Collaborative Execution” (defined as two or more parties working together to improve supply chain performance by continuously solving real problems with better information), focussed on Speed, Innovation and Profitability, overseen by Kevin O’Marah, and sponsored by E2Open that had some rather interesting, and in a few cases, surprising results. First off:

For suppliers, collaboration is primarily a means by which their customers share demand information, with 73% strongly agreeing this is a key aspect of collaboration.

For buyers, an overwhelming 83% believe collaboration revolves around the supplier sharing availability information (e.g. capacity, lead times, etc.).

In other words, both sides agree that collaboration centres on information sharing and, furthermore, the study also found that,
both sides need visibility and want a dedicated problem solver.

This means that the primary barrier to collaboration between most supply chain partners is the fact that companies struggle to share information effectively, with 54% seeing lack of data visibility across trading partners as a perennial problem. Furthermore, the next biggest barrier was speed of issue resolution, with almost 50% agreeing that this was a barrier to effective collaboration. (In addition, 92% agree that quick problem resolution is part of good collaboration.)

But the most surprising result of the survey was that trust, governance, and benefit sharing were not the biggest barriers to collaboration, as commonly suggested, but the ability to connect trading partner information flow, insure quality of information, and synchronize that information for quick problem solving. (For example, almost one half of respondents felt granularity of data was a problem, speaking to the quality issue, and almost one half of respondents saw timeliness of information as a problem.) This says that, for the most part, it is not lack of desire, trust, or willingness to collaborate that is the problem, but a lack of technology to enable collaboration. (And this is a shame, considering that such technology has existed in more than adequate form for at least five years now for even the largest of multi-nationals with the most complex supply networks. It may take some effort to get used to some of the technology, which is only now maturing on the usability front in some cases, but how much of a barrier is it really to spend a few days learning a technology that is going to cut your issue resolution time in half and decrease your risk substantially?)

Given that:

  • collaborative relationships were more cost effective,
    55% of respondents agree
  • good collaboration minimizes risk, and
    75% of respondents agree
  • learning is faster in a collaborative environment
    70% of respondents conclude that the rate of leaning increases by at least one-and-a-half times

Acquiring the technology that your organization needs to take collaboration with your trading partners to the next level should be a no-brainer. (Especially since the last finding means that any operational metric targeted such as inventory days, total landed cost, cash to cash cycle time can be expected to improve one and a half times as quickly as would be the case without collaborative execution. Thus, any appropriate technology acquisition is going to give you a very quick ROI.)

The only other point of interest was the not-so-surprising result that management by exception it seems is still not part of a “truly collaborative” trading partner relationship for a substantial number of companies. This would indicate that collaboration, even among market leaders, is still not very mature. In a mature relationship, each party trusts the other to do what they do best and only gets involved when a deviation is detected or an idea is devised to improve the process or product. But still, it’s nice to know that both buyers and sellers do not see trust as a barrier to collaborating for mutual gain.

EQ does not matter more than IQ — Nice to see not everyone is getting caught up in the hype!

EQ, short for Emotional Quotient and also known as EI, short for Emotional Intelligence, and the next resurgent craze in talent management, is very important in Supply Management given the regularity with which supply management professionals need to interact with suppliers and peers around the globe, the number of disruptions that occur on a semi-annual basis, and the intra- and inter-organizational conflicts they will be regularly called in to resolve. After all, people with high EI have more empathy, tend to stay calm under pressure, and have a knack for effectively solving conflict.

But, despite what Daniel Goleman may have claimed back in 1995 (when he authored a book titled Emotional Intelligence: Why it can matter more than IQ), it does not matter more than IQ. As Zoe Lewis, a director at Harvard Lewis, notes in this piece in CPO Agenda on how “clever is no longer enough”, EI must complement IQ. EI and IQ have equal value and it’s equally important for leaders to have a high IQ because in that position they need to be able to make certain decision. You can be the most motivated, empathic, and socially adept individual in the world, but if you don’t understand a balance sheet, ROI, or even the basics of a production line, there is no way you are going to effectively lead a manufacturing organization — or even make any important decision in its day to day management.

In Supply Management, IQ is just as important as it is in senior leadership. In order to be successful today, a Supply Management professional has to be a master of transition and technology — that includes Spend Analysis, Decision Optimization, and Predictive Analytic Demand Planning Solutions. That requires some serious IQ to understand not only how to use the tools, but what patterns to look for, what models to build, and what statistical and interpolative techniques are appropriate for the categories and commodities being sourced. You can be the most emotionally intelligent man, or woman, in the world and be perfect company for Jonathan Goldsmith, but if you don’t understand how to navigate a spend cube, breakdown costs into raw components acceptable to an optimization solution that uses a piecewise linear mixed integer programming model, or understand the difference between statistical interpolation and comparative pattern matching, well, let’s just say that there’s hundreds of thousands in technology purchases and licenses down the drain.

Of course, it is EQ that makes the difference between a good buyer and a great buyer as the dynamics of the position will continue to change much more along the way of relationship management. This is primarily because the need to reduce costs today is as dire as it ever was and traditional methods of working with suppliers and stakeholders only achieve 3% to 4% improvement a year — not the 30% to 40% improvement targets now placed on some buyers. Even spend analysis and decision optimization, the only two technologies in supply management proven to deliver year-over-year returns in the double digits (at 11% and 12% respectively), will not come close to these targets. Only collaborative sourcing techniques that utilize these technologies as part of joint efforts with suppliers to identify opportunities for significant cost reductions (which take major EQ as well as IQ to pull off) have a chance of delivering those returns.

And the good thing about EQ is that, unlike IQ, it can be improved over time. While you generally realize your IQ potential early on in your life, with effort, your EQ can keep increasing. Even if you start of with no social skills and are outcast like a Napoleon Dynamite, if your IQ is smart enough, you can still become a James Bond, or at least an Alastair Donald, who is a secret agent of business improvement. Once you develop self awareness, self-regulation, social skills, and eventually empathy can follow if your motivation, and patience, is strong enough. You can take self-assessments, courses, or get a mentor. It may not happen over night, but you can get there.

And you can get there faster if your organization makes the move from a training organization, where lessons are forgotten as soon as the next fad is brought in by senior management, to a learning organization where best-in-class methodologies, that are really only best-in-class for your competitor, are not force-fed from the top but developed bottom-up by motivated, engaged employees who want to make the organization a better place to work and share what they learn. That’s the foundation for true EQ in an organization.