Category Archives: Market Intelligence

A Strategic Sourcing Plan Outline

I didn’t go to ISM, but I did check out some of the materials that have been appearing on the ISM site, and one abstract in particular that caught my attention was “Strategic Sourcing Plans Made Easier with a Take-Away Outline” by Robi Bendorf of Bendorf & Associates.

The abstract starts off by noting that the development and implementation of formal detailed strategic sourcing plans for major spend categories has been and will continue to be an essential element of top-class supply management operations – yet most supply management organizations do not have them. Noting that it is generally easier to define plans and procedures when you have a draft to start from, the abstract provides an example of a step-by-step procedure for the development of formal sourcing plans and a detailed outline of what should be in the plan.

The plan outline is worth reviewing, because it outlines what you have to think about in order to develop a good plan. At a high level, the plan outline presented is as follows:

  1. Category Description
  2. Current Business Strategy for Category Utilization
  3. Strategic Sourcing Team
  4. Category History
    • Total Annual Volume
    • Historical Price Changes
    • Lead Time History
    • Cost Improvement History
  5. Current Supplier Overview
    • Supplier Financial Data
    • Quality
    • Delivery
    • Innovation
    • Supplier Relationship
  6. Current Process Overview
    • Supplier Segmentation
    • Supply Chain Map
    • Supplier Selection
    • Contracting Method
    • Ordering Process
    • Performance Measurement
    • Inventory
  7. Supply Market Overview
    • Marketplace Suppliers
    • Marketplace Buyers
    • Competitor’s Sources
    • Market Trends
    • Major Raw Materials
    • Cost Drivers
    • Company Bargaining Power
    • Market Indexes
  8. Cost / Value Analysis
  9. Plan Objectives
    • Short Term Objectives
    • Long Term Objectives
    • Relationship to the Corporate Business Plan
  10. Implementation Strategies
  11. Action Plan

This is a great overview as it demonstrates that a lot of factors need to be considered in the formulation of a plan even at the category level. Without a thorough understanding of the category, the sourcing team will not be able to determine the appropriate cost / value tradeoff and create a supply management plan that will simultaneously achieve cost reduction and avoidance while achieving the business strategies outlined in the corporate business plan.

It’s a Recession, But That’s Okay

World Trade Magazine recently ran a great article by Dan North on “Policy Perspectives: Reading the Economic Tea Leaves: Confessions of a Successful Forecast”. It was short, sweet, to the point, and dead-on – even though it used one of the words that is obviously not in George W. Bush’s vocabulary.

The article points out how many brave economists strayed from the consensus opinion last year because they saw a set of circumstances so compelling that it led them to forecast – very much counter to the consensus at that time – that the economy was likely headed for recession. They were right, and this is the best article that I found that explains why. In short, there were three major forces at work against the economy (and we all know that 3 is enough to cause chaos):

  • inflationary pressures started to bubble
    When the Federal Reserve warned that the economy was growing too fast back in May of 2004, it was right. They raised rates to curtail the effect, but there is normally a lag of at least 3-5 quarters, and more if the market is especially exuberant.
  • crude oil reach a record high in May of 2004 – and then started to skyrocket
    every time crude oil spiked in the last thirty years, a recession followed
  • in August of 2006, the median sale price for an existing home fell on a year-over-year basis for the first time in 11 years
    and this was at a time where the camel could barely stand as the Federal Reserve corrections and crude oil spikes were starting to pile on

Thus, by the summer of 2007, there were three strong negative forces battering the economy. Each on their own had consistently caused recessions in the past. And then:

  • the sub-prime crisis hit
    battering the real estate market with the force of a tsunami
  • other debt crises surfaced
    the storm just couldn’t get any more perfect

A recession was inevitable. But it’s nothing to worry about.

  • First of all, it’s the nature of the market, it surges, it drops, it corrects, and then it emerges stronger than ever!
  • Secondly, these same brilliant economists have noted that the necessary conditions for a quick exit are falling into place and the recession is not likely to last very long, with the recovery curve predicted to start by year end – meaning that we’ll be back to a growth cycle in mid 2009 or early 2010.
  • Thirdly, this is the perfect market for supply and spend management to really take off! Now that savings are on top of everybody’s mind, sourcing and procurement is going to start to get the respect it deserves in all the laggards out there. They’re going to need good solutions. It’s a good time to be a provider of stable sourcing software solutions. Time to kick the development and marketing cycle into full gear. (And don’t make me tell you again where you should be putting those dollars!)

What Defines An Emerging Market?

Knowledge @ Wharton China recently ran an interesting article that asked “when are emerging markets no longer ’emerging’?”. According to the article, dozens of countries, many of which show signs of a strong and growing middle-class population, fall under the label even though they are evolving at their own pace and with their own twists on economic development.

The term, reported to be coined by Antoine W. van Agtmael during a conference in 1981, was initially meant to be a more uplifting definition of ‘third world’ markets that were up-and-coming and good investment opportunities for multi-nationals – and although it initially applied to stock markets in countries with a cutoff of $10,000 in income per capita, the specific numerical references soon faded and now the term is synonymous with ’emerging economies’ and no longer relies on income or other statistical measures.

According to Philip Nichols, Wharton Professor of Legal Studies and Business Ethics, a numbers-based definition is less meaningful than an understanding of the way in which business is done in a country. He defines emerging economies as places that are changing form an informal system based on relationships to a more formal system with transparent rules that apply equally to all market participants.

These economies, according to Witold Henisz, Wharton Professor of Management, are revising their approach to the global economy as resource-rich nations gain clout with today’s booming commodity markets. They are still willing to integrate with international markets and allow foreigners to help build their economic infrastructure, but are demanding a greater share of the benefits.

But what I would like to know is when is a country no longer considered to emerging? It seems some countries like India, China, and South Korea in particular, where per capita income is over $20,000 (well above most countries in South Asia, East Asia, and Latin America), have been “emerging forever”. Given that we are now experiencing a huge shift in the global economy, where many emerging markets are starting to become middle class and where there will soon be One Billion additional global consumers in emerging markets in ten years, this is becoming an important question. (Especially since it is estimated that the economies of these countries will surpass the combined economies of the developed countries in 25 years.) It’s a very good question – and one that some of our best economic minds should be working on.

At this point, it’s clear that China and India are still emerging. When you consider the dismal shape of infrastructure in India and the fact that, in China, household income is 10 times higher in urban coastal cities (like Shanghai) than in rural inland provinces, it’s clear these countries each have a good decade to go at the minimum. But it seems to me that countries like South Korea are almost there.

Consider the purchasing power parity index as reported by the World Bank for 2006. Canada, an established developed country that falls 20th on the list, has a PPP of 34,610. South Korea has a PPP of 23,800. In both countries, if you earned this income level, it appears that you’d pay approximately 15% federal tax. In Canada, you’d have an additional provincial (state) tax of 10%. Thus, after taxes, a Canadian who made 34,610 would likely get to keep about 25,960. A South Korean who made the equivalent of 23,800 in Won would likely get to keep about 20,230. Emerged? I don’t know – but this calculation seems to indicate that if it’s not, it’s almost there.

And when you consider that some companies are now looking at places like Madagascar, as reported by Ashton Udall over on the Product Global blog, to continue to keep their production costs low, it’s clear that some companies are starting to see certain ’emerging’ markets as having ’emerged’ as they are no longer achieving the labor and production savings they have come to expect from ’emerging’ markets with their ‘low cost country sourcing’ strategy.

Any other bloggers want to chime in with their thoughts?

Blame Always Rests With The Importer of Record

Today’s guest post is from Jim Dickeson, a specialist in import/export compliance and a licensed customs broker from “Import Export Geeks”. The post is based on an article that originally ran in the Supply Chain Management Review (EH Publishing) on March 1, 2002.

The five myths harbored by US importers of record that the article highlighted were as follows:

  • Our risk exposure is limited to the Customs duties. An importer’s financial exposure is equal to the value of the imported goods, plus duty! U.S. Customs includes the value of the imported merchandise when determining liability and can assess penalties based on the liability.
  • Customs released our shipment, so we’re out of the woods. The statute of limitations is five years after the material misstatement or omission was made to Customs and the liability on an import continues for five years beyond actual release of the shipment.
  • The seller prepared the invoice, so mistakes are not our fault. The importer is responsible for what is reported on the Customs entry regardless of who prepared the invoice.
  • Our customs broker does all the work, so if there’s a problem, he will fix it. Even if you use a broker, you’re still fully accountable.
  • Our customs broker keeps all entry records, so we don’t need to. Importers are required to keep a copy of all correspondence related to import transactions for at least five years.

When you consider that average error rates in global trade processes approach 10% to 20%, that the effective control of global trade processes is often 100 to 200 times worse than accounts payable in an average company, and that Customs tends to reclaim $7 for every $1 that they spend on an audit, it’s critical that you banish the import (and corresponding export) myths today.

Thanks, Jim!

The 6 Days of X-asperation: Day 1 – Questions to Ask Every Vendor!

Yes folks! the doctor just keeps on giving! In addition to the specific questions on Spend Analysis, e-RFX and e-Auctions, Decision Optimization, Contract Management, e-Procurement, and e-Payment functionality that you should ask your prospective vendor before you even think about making any commitments, as x-emplified during the 12 Days of X-emplification, there are also some general questions that you should be asking each and every software vendor you are approaching for an e-Sourcing or e-Procurement Solution. In this post, I’m going to outline what they are and why they are important. Then, in the next five posts, I’m going to outline the full answers that you want to hear from your vendor. (And that’s why this is the X-asperation series, because if most vendors weren’t exasperated after the first series, you can count on them being exasperated after this one. But that’s a good thing! Do you really want technology that hasn’t been updated since 1999?)

Feel free to thank me, because I know for a fact there’s quite a few vendors out there that aren’t going to thank me for yet another set of questions that they, unfortunately, don’t always have good answers for. (Let’s put it this way, after this series, I’ll be even more relieved that there just isn’t enough money in waste management in the part of the world I call home to attract a certain breed of waste manager.)

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

Chances are that whatever you need to do, you’re not the first company to need to get it done, or the first company to set about to do it. As such, even your best estimates are going to be just that – estimates. They might be close. They might be way off. But if the vendor has a sizable customer base, cares about it’s customers, and works with them, then it will have a good idea of how long it’s really going to take to implement the technology from end to end – in terms of software implementation, data population and cleansing, and project management.

Furthermore, even though most projects should be doable in a matter of weeks, the reality is that many e-Sourcing and e-Procurement systems actually take 3, 6, or even 12 months (or more) to implement because the buying organization isn’t (fully) prepared. Remember, the vendor can only get the work done in an efficient time-frame if you know where your data is (and have negotiated the required access with IT), your processes mapped, and the people on hand with the knowledge to quickly answer data and process questions as they arise during the implementation. If the vendor is any good, the vendor will understand exactly what they will need from you to implement the system in the time-frame they quote and, more importantly, they’ll be able to tell you exactly what you need to do to get there. (If they can’t tell you precisely what data and processes you need, and how to find that data or implement the processes you need, keep looking. You don’t want another expensive piece of software nobody uses. You want a solution, and that solution needs to include the requisite services, training, and knowledge transfer.)

2a. How much functionality is my organization realistically going to be using in 12 months?

In this space, one of two things ultimately occurs, either an uninformed buyer asks for pie-in-the-sky functionality because they read some BS propaganda somewhere that said they absolutely need it, or, more often than not, some uninformed or FUD spreading salesperson tells them they absolutely need it (and that only the company they represent can offer it). The fact of the matter is, you usually don’t need more than the basics during an initial implementation (as long as the key features addressed in the early posts in this series are there) to be productive and get a good initial ROI from the system. (You’ll eventually want the more advanced features, but you won’t be ready for them right away, and implementing them too early can sometimes do more harm than good!)

Furthermore, how many tools are there with more than a few dozen features where you regularly use all the features? You’re probably familiar with Word. Word 2000 has hundreds of features. The same holds true for Word 2003. Word 2007, like every version before it, added over a hundred features. How many have you used, ever? And, more importantly, how many do you use regularly? A small fraction, on both counts. It’s not how many features the tool has, but how many features you really need. Therefore, it’s also important to ask:

2b. How much functionality do I really need?

Chances are, not as much as you think. (As my X-emplification series attempted to point out – most of the time it boils down to a small set of key features.) Map your processes and pains and then, with the help of an independent consultant if necessary, map these to basic system and software functions. What falls out is what you need, what’s left, you probably don’t – or at least you don’t need it right away. More importantly, make sure the vendor answers:

2c. And how does this functionality solve my #1 pain today, which is X?

If you have a major pain point, like maverick spend, lack of spend visibility, or a paperwork nightmare due to compounding compliance and regulatory requirements in Europe that are driving you batty, make sure the vendor is able to clearly explain how their tool will solve that problem, how your buyers will use the tool on a daily basis to do the work they need to do, and how long it will take them to perform these common tasks that they need to do everyday. If the tool isn’t able to do what your buyers need it to do, when they need to do it, and do it significantly faster than they can do it manually, then it’s likely not the right tool for you.

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

An enterprise software tool isn’t e-mail, word processing, or web searching. It’s not something you can expect the average user to figure out on her own, at least not in any reasonable time frame. Nor can you expect them to grok it from reading a manual. Let’s face it … supreme court opinions and the resulting in-depth analyses by legal scholars are children’s literature when compared to the average technical manual. If you want your people to be productive on the tool, they need to learn the tool, and for that they are going to need training. If the vendor has well-designed multi-media self-study courses, then your buyers will be able to do a lot on their own, but they’ll still need questions answered and demos that show them how to use the tool to do tasks specific to their organization. There’ll always be a traditional training requirement. Furthermore, the more features they have to learn, the longer you should expect that training to take. If a vendor representative is selling you a full suite and says training will take a day, he’s clueless or the suite doesn’t do anything. This will sometimes be a judgment call, but a good general rule of thumb is that for each major piece of functionality (or module), you should expect somewhere between half a day and a couple of days for a sufficient mastery of the basics. (Longer if the system is not user friendly.)

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

Let’s face it, especially where a few traditional behind-the-firewall vendors are concerned (and the ones that offer you 50% + discounts in particular), the software cost is never the full cost of the system. In fact, with some vendors, it’s not even close!

In the traditional on-premise model, or the ASP hosting model (which should not be confused with true multi-tenant on-demand), the vendor quotes you a cost of a license to use the software for a fixed term, but that’s all the quote includes. When you go to buy, that’s when you find out that there’s also an installation fee (on-premise) and / or initialization fee (hosted ASP) to install the software and get it ready for daily use, which doesn’t include the initialization services fee where they load your data, users, etc. And let’s not forget about the yearly maintenance fee. And of course, when you need to install the first update, there’ll be an update fee to install the patches for you. And we all know that the training costs are never included.

If you’re lucky, it stops there. If you’re not, you find out that you were sold the “basic” version, but the functionality you really need is in the “professional” version or “enterprise” version and that you have to upgrade and pay a rather substantial upgrade fee, as well as a higher maintenance fee on the back-end. Then there’ll be a need for data conversion and enrichment services, which will cost extra. And of course, there’ll be more training, at additional training day rates.

But even if the basic version is enough, you might find out that you need bigger, better, faster, hardware – which can come with a hefty price tag. After you get the system implemented, you might realize there’s too much work for you to do to ready all of your projects on the new system and that you need to bring in some services professionals to augment your team. And so on.

A 100K system can end up costing you 1M* (or more) over the course of the first two years and your expected ROI of 10 can vanish seemingly overnight! If you don’t get the most honest answer of all to this question, stop the process with the vendor here and now. No matter how good the system might be, it’s not a solution if it costs you money. (After all, if it’s just labor savings, somewhere in the world there’s people in a developing country who’ll still work for pennies on the dollar. And they won’t ask for a 1M software system – which they probably aren’t educated enough to use anyway.) If you do think you are getting an honest answer, and all they are apparently charging you for is licensing and some standard services, then you should still make good and sure that they’ll incorporate explicit provisions in the contract that indicates that all of the services and updates needed to make the system work, are included in the license or maintenance costs – and not separately priced. Otherwise, you might find that the vendor changes its tune six months down the road.

*I’m not saying you shouldn’t pay 1M (or more) for a good e-Sourcing or e-Procurement suite, but that you need to make sure the ROI is there. If you’ve done your baseline and benchmarking and expect the solution to save you 5M to 10M over the timeframe where you spend 1M, then it’s a good deal. But if you do your baseline and benchmarking and the 1M system is only going to save you 2M, tops, I’d think twice about buying it. (Also, you’re likely only going to get this level of savings if it includes real spend analysis, real strategic sourcing decision optimization, or true end-to-end procurement cycle integration.)

5. You say you care about your customers and that you are going to provide great service. Prove it!

You should be able to choose from half a dozen references. The vendor should have a process to make sure all bugs are immediately logged, investigated, and incorporated into a release cycle. There should be a methodology to develop work-arounds or temporary patches if the functionality is critical. You should be allowed to go to the next conference or user meeting before you buy. The vendor should be more than willing to share the knowledge you need to answer each of these questions fully, completely and, if you missed any of these important questions, willing to point out what those questions are and why they feel that you need to ask the questions – without answering the questions for you. You want a vendor who’s willing to let you do your own research, confident that there’s a very good chance that you’ll come back to them.

6. Can I take it for a test drive or a short term lease?

The reality is that you don’t want to be dropping a huge bundle of dough on an integrated solution on just a hope and a prayer. It’s best to spend some time with a very modest commitment of dollars and resources to test drive the product in the context of your projects and your needs. Get a flavor for what it can do, and how much it can save you. You can always dive in and buy the whole kit-n-kaboodle later. (The vendor’s not going to say “sorry, you can’t buy any more – we’re sold out”. It’s software, not limited edition collector plates.)

Furthermore, until you’re able to baseline not only how well you’re doing now, but benchmark how much the proposed solution could realistically reduce the baseline over time, you won’t be able to figure out if the ROI is really there or not. And that’s what it’s all about, isn’t it?

7. Can I buy it or implement it in pieces?

Finally, even if you do decide that enterprise suite E is the solution for you, you still want to be able to roll it out in manageable phases or chunks. Your users aren’t going to be able to lean an extensive suite overnight, so even if the vendor was true multi-tenant on-demand and could get it up and running, with your users and key data, in a matter of days, it wouldn’t help you.

So come back tomorrow as we put the e-RFX & e-Auction vendors through the wringer again by diving into the questions above!