Category Archives: Market Intelligence

If a Deal Is Too Good To Be True, IT IS!

This is just as true in technology and services as it is in products. If you get four bids for a new technology platform and / or (integrated) services package and three are plus or minus 20% and one is 1/3 of the price, I guarantee that lowball bid is too good to be true. And if you did your homework, you’d instantly know it and disqualify it.

You buy a product or service because it’s cheaper to buy than to build or perform it in house. However, that product or service still has a cost to the vendor, in terms of manpower and resources — costs the vendor has to meet in order to deliver you a quality product or service. If the vendor doesn’t cover these costs, and make a fair profit, one of two things is going to happen — the vendor is going to go out of business trying to serve you at an unsustainable level or the vendor is going to deliver a significantly inferior product or service to stay afloat.

I’m reminding you of this because a number of companies have not only been looking for new solutions now that we’re into a slow recovery, but because a number of companies, desperate to reduce costs, have been rebidding everything under the organizational umbrella, including the supply management platform(s) and service contracts. And in doing so, many of them have been getting unbelievably low bids from a handful of vendors who are desperate to win (new) market share — and the companies are seriously considering these bids. These bids are unbelievable for a reason — they’re not real. They’re up front costs, and as soon as you sign on the dotted line, you’re going to be hit with “change fees”, “service costs”, “upgrade fees”, etc. if you want the same level of service being offered by the competition, who are all in the same ballpark at sustainable bids. Or, even worse, the vendor is just going to give you the platform or an initial spending report, and then disappear until renewal time because the cost only covers platform support, not project or customer support. Or, and this is the worst situation of all, the vendor is trying to build a new business (in a new vertical) and thinks it can use you as a marquis customer to attract new customers, who it will overcharge to make up for the loss on you. If it works, you’re in luck, but the vast majority of the time what happens is that either the vendor fails to deliver, because they didn’t understand the true success requirements or they didn’t understand how much it would cost and how long it would take to make you a success, and then shuts down the business. If you’re lucky, they just shut down the vertical and you get to keep using the platform until you can find a new vendor. If you’re, not, the whole vendor goes tits up and you’re left holding the empty bag.

The worst part is that every month, if not every week, I hear of yet another company who signs on the dotted line with one of these vendors offering “unbelievable” deals that “can’t be matched” — and, even worse, the company is one that should know better (because there are success stories that illustrate it understands many of the precepts of good supply management). Especially when it’s so easy-peasy to determine if a bid is reasonable or not.

It’s easy to determine a reasonable range for a (bundled) technology platform (and /) or service. All you have to do is build a should cost model. Let’s say you’re buying a SaaS e-Procurement platform and want regular project management support, best-practice training, and custom integration to your in-house technology platform. Then you know the vendor will have, at least, the following costs:

  • Platform Delivery & Maintenance
  • Account & Project Management Personnel
  • Development Personnel

If the SaaS license will require 1/50th of their data centre resources, then the base overhead to support you will be 1/50th of their data centre and support team costs. If you require about 20 hours a week of account and project management support and training, then you will require half of a senior resource who has expertise in your industry and categories. If the custom integration is expected to take two man years, than you will need the equivalent of two developers on the vendor’s staff dedicated to you.

Now, if the average cost to maintain a small data centre, or rent part of a data centre, that will support 50 similar-sized enterprise clients is 3M, then you can quickly estimate that it will cost the vendor 60K (+- 10K for a margin of error) just to have you on the books, before it lifts a finger. If the senior resource required to support you on your projects is a 120K to 150K resource, then it will cost the vendor 60K to 75K to dedicate this resource to you half of the time. And if the average developer with the necessary skills is going for 70K to 90K, that’s another 140K to 180K that the vendor needs to outlay to support you. Then, there’s the vendor’s cost of sale, which, depending on commissions structures and expenses, is probably in the 15% to 25% range, and the need for the vendor to make a fair profit, say 10% to 15%, to keep investors happy. If you add it all up, you get:

Cost $ Range
Platform Delivery & Maintenance 050K to 070K
Account & Project Management Personnel 060K to 075K
Development Personnel 140K to 180K
Subtotal 250K to 325K
Cost of Sale 040K to 070K
Profit 025K to 050K
Total 315K to 445K

This tells you that any bids you get in and around the 315K to 445K range are reasonable, that if you get any bids that are more than 600K, the vendor either doesn’t understand what you want or is trying to rip you off (up front), and that if you get any bids less than 250K, either the vendor is planning to not support you to the level you need to be supported, the vendor is planning to make it up later with “change fees” and “service fees” when you’re locked in to a long term contract and held captive, or the vendor is looking to make a poster child out of you and take unfair advantage of the relationship (and then leave you holding the empty bag if things go south).

Regardless of why the vendor gave you the unbelievable bid, one thing is clear. If you accept it, you will get screwed.

Implementing VFS: A Beginner’s Guide, Part III

In our last post we presented an example of how a leading technology company, namely Apple, probably used a variation of the Value Focussed Supply Strategy when they decided to enter the smartphone market with the iPhone and illustrated, with a few liberties, how the VFS process could have led them to that market and that product and the success that followed. In this post we are going to elaborate on the process that was described in CAPS recent report on “Linking Supply to Competitive Business Strategies”.

Given the following seven-step process that we outlined in our last post:

  1. Understand Customer & Supplier Markets
  2. Identify Directional Changes
  3. Link Insights into Directional Changes to the Business Strategy
  4. Evaluate the Company’s Strategic Options
  5. Set Holistic Value Focussed Goals
  6. Evaluate and Select Strategic Supply Options
  7. Identify and Implement Levers

We can identify the following key questions for each step:

  1. Understand Customer & Supplier Markets
    • What are customers buying and what do they want to buy?
    • What is the balance of supply vs. demand in the supply market?
    • What capabilities do organizational suppliers have that are not being utilized?
    • Are there any limitations on raw material supply?
  2. Identify Directional Changes
    • How are customer buying patterns shifting?
    • Is a market transformation occurring?
    • Is the supply base expanding or consolidating?
  3. Link Insights into Directional Changes to the Business Strategy
    • Which categories and products are likely to have the greatest market demand?
    • Which categories and products will have the greatest impact on financial and market performance in the short and long term?
    • Which categories and products fit with the business strategy?
  4. Evaluate the Company’s Strategic Options
    • Which categories and products could be truly strategic now and in the future?
    • How would each of these shape the company’s market presence and supply chain?
    • From a VFS viewpoint, which are the best options?
  5. Set Holistic Value Focussed Goals
    • What performance is expected from the supply base?
    • What performance is expected from the organization?
    • What performance is expected from the distribution partners?
  6. Evaluate and Select Strategic Supply Options
    • Which suppliers will be used? Which are strategic partners and which are tier two?
    • Will the organization handle JIT inventory itself or use third party inventory management services?
    • Will the organization manage distribution itself or hand it over to a 3PL?
    • Will the organization use currently existing supply markets and supply chains or create new ones?
  7. Identify and Implement Levers
    • What can change the market dynamics?
    • What can change what is bought?
    • What can change interaction with suppliers?

The answers to these questions will dictate:

  • target market,
  • primary category,
  • key product(s),
  • key suppliers,
  • VFS strategy,
  • VFS goals, and
  • VFS levers.

In our next post we will dive into some of the key questions in each category and explain some of the thought process that will help lead the organization to the right answer(s).

Implementing VFS: A Beginner’s Guide, Part I

Last month, before our detailed dive into Next Generation Sourcing, we discussed the four levels of CAPS’ Value Focussed Supply, as put forth in their recent research report on “Linking Supply to Competitive Business Strategies”. Companies on the VFS path start by eliminating value leakage (Part I and Part II), before increasing current value, and creating tomorrow’s value on their way to the stretch for added value. Companies will embark on the VFS path because if they don’t take their value to the next level, the value they see from the current generation of (e)Sourcing strategies and technologies will start to disappear as more and more companies adopt leading supply strategies and increase average performance across the board.

But how does an average company go about starting? Without a starting point, it is likely that if VFS emerges in an average supply management organization, it will be by accident, especially since this is how it appears to have emerged at a number of leading companies profiled in the report. And while a market leader may have the time and resources to experiment with different strategies (due to their superior market position and better financial position), in today’s economic climate, an average organization does not. So what should an average company do?

To this end, CAPS offered a “framework” in Chapter 4 of their report to get companies started. However, as it only outlined a high level process, and not any supporting technologies or (advanced) methodologies, it was more of a guide than a framework. But it’s still a good starting point, and appropriately presented outlines the mindset required to move from traditional supply strategies to value focussed supply strategies, such as High Definition Sourcing that can Move Category Excellence to the Next Level.

And like many guides these days, it can be broken down into a seven-step program that will get a company on its way. Specifically:

  1. Understand Customer & Supplier Markets
  2. Identify Directional Changes
  3. Link Insights into Directional Changes to the Business Strategy
  4. Evaluate the Company’s Strategic Options
  5. Set Holistic Value Focussed Goals
  6. Evaluate and Select Strategic Supply Options
  7. Identify and Implement Levers

The next few posts will explore this “program” and how a company can get started down the value focussed path.

Dell’s Guide to Growing in India

In four short years, Dell has risen to become the number one supplier of desktops, laptops, and notebook computers in India, going from sales of only 79,244 in 2007 to over 1.1 Million in 2010. This is more than HPs market share of 1 Million and Lenovo’s market share of about 600,000. So what did Dell do to rise to the top, acquiring year-over-year growth of 55% along the way? This recent article in Fortune on “how Dell conquered India” provides some interesting insights.

So how did Dell do this?

  1. They set up a factory in India.
    This cut local delivery time by 50% while improving profitability.
  2. They changed the model.
    While online worked great in North America, exclusive outlets worked much better in India. Once a customer selected a product, it was then delivered to their door (which saved on warehousing costs).
  3. They borrowed from the insurance model.
    Rather than use the established national, regional, and local retail distribution model, they determined that the insurance model fit best with their exclusive outlet / build-to-order strategy and used it instead.
  4. They extended the on-site service model to small businesses and retail customers.
    This gave them an edge over the competition.
  5. They built a core team in India focussed on growth.
    They were sure to recruit the best not only from other Dell international divisions, but from rivals (like HP and IBM) and retailers (Unilever, Whirlpool, and Airtel) who had experience in the India retail market.

In otherwords they:

  1. Established a local presence,
  2. Adapted to the local retail market, and
  3. Handed the reigns over to a team that understands the Indian marketplace.

While it will take a lot of work to brew up this recipe for success, it’s not a hard one to understand. To do well in a region, whether you are buying or selling, you need to go local, adapt, and work with the right partners who understand the region.

VFS Level 2: Increase Current Value

Today’s post continues our exploration of the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

The next level of VFS, after (most of the) value leakage has been eliminated, is to increase current value. SI is in full agreement here. This should be one of the primary focal points of every Supply Management Organization as it has to be about more than just cost reduction. According to CAPS, the next level of the value curve is obtained by continuing the focus on the four critical components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to take improvements to the next level. At this level of VFS, this means that a company would:

  • Enhance Revenue
    by increasing market share and improving pricing, which could involve a focus on local markets to tailor products to local taste
  • Understanding Real Cost and Reducing TCO
    by modelling what the costs are, and should be, and focussing on the costs that are too high and “attacking them broadly”; this could include finding alternate, cheaper, sources of supply
  • Increasing Productivity of Fixed Assets
    to get bang for the buck, which could include involving suppliers early in custom component design to improve manufacturability and lower costs or the rationalization of specifications to improve operational flexibility
  • Enhancing Corporate Reputation and Increasing Customer and Supplier Loyalty
    by targeting customer needs or working with suppliers to help them improve processes and lower costs

Probably the best example the report gave to increase current value was to follow Comco’s lead. Comco put engineers on site to help suppliers improve processes (using lean and quality management techniques), opened up 3rd party manufacturing research centers (to help its suppliers innovate and reduce costs while improving quality and reliability), and created cross-functional workshop that spanned internal and external organizational boundaries. These actions not only increased current value in the near term, but increased the value the organization could expect in the future, which began the organization’s progression to the next level VFS (which will be discussed in tomorrow’s post).

Again, SI agrees with all of these recommendations, but believes a few key points were missed that are critical to an organization pursuing additional value. Specifically:

  • Revenue Enhancement
    often begins by cutting unprofitable product lines. If a product line is inherently unprofitable, no amount of supply chain optimization can fix things. Supply Management has to do an impartial profit analysis of all of the product lines and determine which are, or could be, the most profitable, which lines should be consolidated, and which lines should be dropped completely.
  • TCO Reduction
    starts with should-cost modelling, continues with should-cost modelling on a component level, and attempts to identify common costs that can be reduced across categories through component rationalization or direct sourcing of raw materials on behalf of a supplier
  • Fixed Asset Utilization
    should also include a cost-benefit analysis of current fixed assets and whether or not they should be maintained or sold
  • Reputational Enhancement
    by focussing on common customer concerns, such as sustainability, and finding ways to embrace them in a cost-effective manner

SI feels that an organization cannot maximize current value unless it starts by understanding the areas where the value is and focussing on those areas, even if that means it has to pull out of certain other areas. And once an organization has maximized current value, it is ready to move on to the next step of VFS, which is the subject of the next post.