Category Archives: Market Intelligence

The Control Provided by e-Sourcing is Only an Illusion – YOU HAVE NO CONTROL!

A recent post on one of the lesser known sourcing blogs indicated that, due to the lack of economic upturn in most of the developed world, maybe now is the time to finally try reverse auctions. The rationale, quotes from a CEO and his team that watched their first reverse auction that indicated that it was simple, powerful, easy to follow, effective, and, most importantly, if you read between the lines, gave them an illusion of control over the process and the results.

This, and some of the messaging coming from a few of the smaller e-Sourcing providers, is scaring me. I fear that adopters may believe that adopting this technology may give them some control. Well, as this recent article over on Chief Executive on why you should “embrace tomorrow’s strategies” clearly points out, you have NO control! You can manage the process, but you have no control over the outcomes. Why? For starters

  • Cartels, cabals, speculators, organized crime, and entire countries are constantly manipulating commodity prices.
    Case in point: China possesses over 90% of many of the rare earth metals used in many technologies (smart phones, batteries, etc.) and when they recently reduced exports, a steep price increase resulted that triggered a costly disruption of delivery of the precious commodities to global business.
  • Disasters are on the rise.
    Industrial, agricultural, and political disasters are increasing in frequency and wiping out production in entire regions. For example, the nuclear meltdown in Japan affected most businesses that rely on a Japanese supplier.
  • Global currency fluctuations, unforeseen credit crises, and economic stagnation are increasingly severe and unpredictably enduring.
    The extreme fluidity in the valuation of imported and exported goods, services, and components is as equally difficult to predict and manage.

No e-RFX or Auction is going to help you regain control over these economic nightmares that you have to deal with on a daily basis. And any provider that’s trying to sell you 1999 e-Sourcing technology to deal with the current economic stagnation doesn’t have a clue. There’s only one way you can even hope to adapt to the constantly changing reality, and that is through the adoption of a supply management platform with advanced data analytics capability. You have to constantly monitor, react, adapt, predict, plan for what-if, monitor, react, and adapt again. This requires extensive data acquisition, mapping, transformation, and analysis that only a real analytics solution, with advanced (spend) analysis, optimization, simulation, and reporting is going to provide. Don’t get fooled. All auction platforms give you in this day in age is a false sense of security. Sometimes an auction is the right way to go, but, most of the time, an auction (on its own), is not the answer.

Talent is Critical to Your Supply Management Organization

For those of you paying attention, you’ll notice that I recently did a four part series on Talent Management and, more specifically, a common Talent Management problem shared by many enterprises. Starting with a post that said If This is Your Advertisement for a Sourcing Manager, You Have a Talent Management Problem, which discussed one of the worst advertisements I have ever seen for a Supply Management professional, the series then moved on to explain that If You Want to Attract Talent, [You Need To] Start with a Good Advertisement, discussed What a Good Job Advertisement Might Look Like, and finished up with a post that addressed Now What [That] Your Job Advertisement Actually Attracted a Good Candidate. I did this because talent is critical to your Supply Management function. Without the right talent, you might as well fold up the operation and outsource it all to a third party because you won’t get anywhere unless you have the cream of the crop.

And we’ve known this for a while. Back in 2007, Procurement Leaders published a piece on how “People Do Matter Most, Really” that referenced a joint study undertaken by McKinsey & Company and the Supply Management Institute that found that high performing firms had high performing purchasing departments and that what matters is the people in the purchasing department, how talented they are, how motivated they are, and how they interact with the wider organization.

Specifically, the study found that purchasing departments that excel in these aspects of their activities achieve savings two and a half times higher than those that don’t. Furthermore, their positive influence branches out beyond the historical territory of PSM to include areas such as revenue, innovation opportunity generation, and the leadership of commercial change in the company. In more detail, high performing firms demonstrated annual purchasing savings of 3.5%, a 1.4% annual reduction in COGS, and an average EBITDA of 17.7%. Compare this to low performing firms that only achieved a savings of 0.6%, a 0.5% increase in COGS, an an average EBITDA margin of only 12.7%. And now that every dollar might mean the difference between survival and corporate death, an organization just can’t afford to not be high performing.

The reality is that, despite what some vendors and consultancies might have you believe, first rate platforms and processes are not enough. You have to have the people with the brains and the skills to use them. Back room paper pushers won’t cut it anymore. So do you research and attract some real talent. The bottom line will thank you.

It’s a Knowledge Economy – Are You Ready?

Today’s economy is a knowledge (driven) economy, “one in which the generation and the exploitation of knowledge has come to play the predominant part in the creation of wealth. It is not simply about pushing back the frontiers of knowledge; it is also about the more effective use and exploitation of all types of knowledge in all manner of economic activity“. Very little has changed since the Department of Trade and Industry of Great Britain penned these words in 1998.

In fact, the importance of knowledge in wealth creation is accelerating by the day now that global trade, information technology, new media, and, in particular, the social web is increasing in innovation, size, and market penetration on an exponential basis. Leading organizations now “follow the sun” and operate core business processes 24/7/365 on a global basis. Product and service pricing are increasingly being driven by value first and cost second. Organizations have to either accept the new economic reality created by the knowledge economy or fall further behind their peers in sales and market size.

From a supply chain vantage point, not only have the last twenty-five years produced an explosion in the application and availability of computing and communications technology in all aspects of life and business, which was only hastened by the wide-spread adoption of the internet, but they have also produced a revolution in supply chain theory and best practices. In lockstep we’ve gone from MRP to MRP II to ERP to a mix of Best-of-Breed Supply Chain and Global Trade solutions on the technology side to decentralized tactical buys based on hardball price negotiation to centralized global strategic supply negotiations on the process side.

In today’s fast-paced knowledge economy, only the strong survive, where the strong are those organizations with modern processes and technology and the wherewithal to use them. The question is, does your organization belong to this group?

To find out more, download the latest white paper by the doctor of Sourcing Innovation, sponsored by BravoSolution.

Is Your Organization Serving the Right Market?

If your Supply Management organization is part of a global multi-national, chances are that it is buying from China and selling to the U.S. And, for a few of you (in heavy machinery, luxury goods, etc.), chances are that your Supply Management organization is producing Made in the USA goods and selling these to China. But should it be?

Ignoring the fact that rising costs in transportation and production (due to raw materials and the inevitable rise in labor wages) coupled with the decline of the US dollar often make sourcing close to home (in Mexico) or at home cheaper than off-shoring, especially when quality and risk-related costs are taken into account, the organization might be missing out on a much bigger opportunity — selling in China. As per this recent article in the Harvard Business Review that chronicled “What the West Doesn’t Get About China”, China is the world’s largest consumer of automobiles, motorcycles, mobile phones, luxury goods, and shoes and the world’s second largest consumer of home appliances, consumer electronics, jewelry, and the internet. Thus, if you are in the automotive, electronic, appliance, apparel, or jewelry industries, maybe the organization should be producing in China for China.

China, which is the world’s second largest economy, has over 1.3 Billion people and an emerging middle class flocking to urban areas. The Asian Development bank classifies over 60% of China as middle class. That’s almost twice the population of North America! And half of them have internet access, with most of them having broadband access in their densely populated urban centers. In fact, China now has about 90 cities with a middle-class population of 250K or more. The US and Canada combined have less than 70 such cities. And the projections expect this number to quadruple over the next 10 years. Plus, annual growth in some markets is as high as 60%.

In other words, if the organization is producing in China, then it should probably be producing for the local market (as well).

Is Your Supply Management Organization Being Held Back?

A recent article over on the CPO Agenda on “Fresh Thinking”, which noted that Procurement must be bolder in bringing about wholesale change that delivers effective results for the business, highlighted a number of areas that could be ripe for change. These areas need to be looked at carefully because their current state could actually be holding the Supply Management organization back. In order to advance, Supply Management cannot accept the status quo when the status quo is an outdated, ineffective, and or costly way of running the business.

The following five areas are ripe starting grounds for a Supply Management organization that wants to take its operations to the next level.

  • Organizational Rules
    Are organizational rules limiting opportunities for efficiency and effectiveness? There are a number of ways organizational rules could be impacting the Supply Management organization, including, but not limited to:

    • Diversity/Buy American Mandates
      While it’s often a good idea to diversify spend and buy at least some products or services at home (to address offshoring risks), excessive diversity or buy american mandates can severely limit options and have a dramatic impact on efficiency and effectiveness.
    • Payment Terms
      If finance is imposing egregious payment times on suppliers (of 90 days or more), this will limit the supply base that is available to the organization as some suppliers won’t stand for such BS.
    • Approval Chains
      If Procurement has to get a sign-off from each affected organization before every buy, and executives for buys over a certain dollar limit, they will be spending more time trying to get signatures than doing their job. Sign-offs should only be required for critical buys or very high dollar buys, not for office supplies or temp services.
  • Specifications
    The specifications could be outdated, non-standardized, or overly specific and all of these can add cost and drain efficiency.

    • Overly Specific
      If the specifications call for specific components from specific suppliers that are essentially commodities, they are overly specific and limiting competitiveness.
    • Non-Standardized
      If each department has their own specification for a workstation with a different configuration, this can limit leverage — especially since it’s very easy to standardize on an office workstation configuration for business people and one for technical people.
    • Outdated
      If the specs are calling for components that are now only being manufactured by a 10th of the total supply base or using materials that are no longer in common use, then the specs are outdated and should be refreshed.
  • Marketplace
    The marketplace could be holding Procurement back by holding on to outdated products or insisting on a wide-diversity of products when only a few should be required. For example, customers may love the old, regular un-concentrated laundry detergent which costs more to package and transport and is less environmentally friendly than the new concentrated formula or may be split between six scented varieties of your dish detergent. In the first scenario, Procurement will need to work with Marketing to push the new, environmentally-friendly, product while phasing out the old product and in the second, Procurement may have to work with engineering to find a way to mass produce the base detergent and mix the scent in later to avoid six low-volume, high-cost production runs.
  • Perception
    If the rest of the organization thinks of Procurement as the back-room, paper-pushing organization where careers go just before they are put out to pasture, it is going to be challenging for Procurement to gain respect, exert influence, and get a majority of spend under management. Procurement will have to work on its image first, get some quick successes, and leave major organizational change to later.
  • The Ideal Solution
    If the concept for the “ideal solution” is outdated, then Procurement’s efforts will be outdated. Before effecting significant change, Procurement has to know what the optimal state is and why.