Category Archives: Miscellaneous

Supply Chain Humor This Week I

Extra! Extra! Read all about it! The Talent Crunch impacts Supply Quality Down Under!
Durex, hard on it’s luck, had to put out an open advertisement to find qualified product testers for its leading brands of condoms. I kinda thought that was a job every college guy wanted. Guess it’s just the North American college guy’s dream …

Hat Tip: Tony Poshek, aka The Cynical Sorcerer

What? Those Things Need Power?

The One-Laptop-Per-Child (OLPC) program screwed up big-time in its latest gift of 300 laptops to a Nigerian school – one per pupil – when they failed to investigate whether or not the school had any power to run, or even charge, them. And they say China has issues…

Hat Tip: Tony Poshek, aka The Cynical Sorcerer

Canada Loses Out On The Spice Trade Again

The Spice Girls are back and are performing at least 11 shows spread over five continents, but despite three US performances, there is not one performance in Canada – not even Toronto or Vancouver! When the spice trade is involved, we never win. But at least fellow blogger Doug Hudgeon of Vendor Management (renamed Contract Capital Management [WayBackMachine]) will get a chance to see them in Sydney on January 12, 2008. After all, according to Yahoo Music, they aren’t really much different than The Dandy Warhols.

Surviving China’s Rapidly Changing Sourcing Tides: Part I

About an hour ago, the webinar by the same name, hosted by MFG.com and Aptium Global, and moderated by none other than Spend Matters own Jason Busch, wrapped up. This webinar had some fascinating insights into the current state of China sourcing, which has many people in a frenzy due to the massive VAT rebate changes that went into affect on July 1.

The current hullabaloo is due to the fact that on July 1, China cancelled VAT rebates on approximately 553 products, reduce the VAT rebates on approximately 2,268 products, and only exempted VAT charges on about 10 products. In other words, about 37% of the total classifications have had the VAT rebates slashed or eliminated. The VAT rebates were created in the 90’s at a time when exports were low to support growth in the export economy. However, now that there is a huge trade surplus with many trading nations, especially with the US ( to the order of 14 B ) China apparently wants to rectify the situation. Typically, Chinese companies are supposed to pay 17% VAT when they sell a product. Until recently, the VAT rebates drastically reduced (or eliminated) this tax on exports – but now that they are being eliminated, some products could end up costing you 17% more.

According to James Jin, the head of the MFG.com Shanghai office, the purpose of the VAT Refund Change is to reduce the trade surplus, eliminate high energy consuming & resource intensive exports, avoid products triggering trade functions, and give China more spending power. As a result, there are will be increased export prices on lower value add products such as fasteners, extrusions, etc; serious financial pressures on Small and Medium enterprises in China with low margins, especially going through trading agents, and some of them will likely go out of business; and increased opportunities for imports into a growing, and opening, Chinese markets. In the short term, the rebates cause quite a panic among those suppliers being negatively impacted who caused major traffic jams during the last through days of June trying to get their products out of the country before the VAT changes came into affect.

However, according to a recent survey conducted by the MFG.com China team, it looks like things aren’t all that bad. The Shanghai office conducted a poll of IPO (International Purchasing Organization) buyers on July 6 and received the following answers to the six questions presented:

  • What is the impact of the VAT reduction on your purchasing?
    Significant: 16%; Some 37%; Insignificant: 21%;
  • How much is the overall estimated purchase price increase?
    >5%: 26%; 3-5%: 11%; 0-3%: 21%;
  • How does material cost increase impact your China sourcing?
    Significant: 26%; Some: 26%; Insignificant: 32%;
  • What is the estimated price increase due to China material cost increases?
    > 5%: 22%; 2-5%: 33%; 0-2%: 17%;
  • What is your solution to the risk of increasing cost?
    Share Risks with Suppliers: 33%; Re-source in China: 22%;
    Switch to other Low Cost Countries: 19%; Maintain Pricing: 15%;
    Other: 11%;
  • What is your predicted sourcing trend for China in the long run?
    Increase: 79%; Decrease 11%; Unchanged: 5%;

In other-words, despite the fact that 53% of IPO respondents expect the VAT reductions to have some (negative) pricing impacts, with 37% expecting those price increases to be at least 3%, and despite the fact that 52% of IPO respondents expect material cost increases to also have (negative) pricing impacts, with 55% expecting those pricing increases to be at least 3%, 79% of respondents still expect to increase their China sourcing, with 55% planning to do so either by sharing risks with suppliers or re-sourcing to other in-country supply sources.

The MFG.com Shanghai office also polled the Chinese suppliers and found the following:

  • How does the VAT refund reduction impact your exports?
    Significant: 6%; Some: 29%; Insignificant: 29%; Not at all: 36%
  • How much of a price increase is likely to result from the VAT refund reductions?
    >5%: 18%; 2-5%: 12%; 0-2%: 0%; Not Sure: 18%; 0% – 52%
  • How are China material costs impacting exports?
    Significant: 32%; Some: 18%; Insignificant: 28%; Not at all: 18%; Unsure: 4%
  • What price increases could result from material costs??
    >5%: 14%; 2-5%: 30%; 0-2%: 5% 0%: 41%; Not Sure: 10%
  • How do the export cost increases impact competitiveness for the North American / European markets?
    Significant: 26%; Some: 11%; Insignificant: 32%; Not at all: 26%; Unsure: 5%;
  • If impacted, what is the solution? ?
    Increase Price: 43%; New Customers: 19%; Reduce Costs: 15%;
    Change Products: 4%; Other: 19%

In summary, 35% of responding suppliers believe that the VAT will impact their exports, with 30% expecting at least a 2% increase, but I’d suspect they are still more worried about material costs with 50% expecting material costs to have a (negative) impact on exports and 44% expecting the associated price increase to be at least 2%. Fortunately, only 37% believe their competitiveness will be affected and 57% are going to look for solutions that do not involve increasing price.

But, as pointed out by James, what is really important to note is that, despite the recent smear campaign (and despite the fact that since 2005, 431 Chinese-made goods have been recalled in Canada alone), many China suppliers consistently perform well and to high quality standards. For instance, MFG.com tracks ratings of all its suppliers, and 92% of China suppliers receive high or perfect ratings on quality, 96% of China suppliers receive good or excellent ratings on responsiveness, and 90% consistently deliver early or on time, giving them a rating of very good or excellent 72% of the time, and good or better 92% of the time. In other words, the vast majority care about the products they make and will work with you to correct any issues – but you have to manage them as you would your own plant and make sure quality materials, processes, and systems are being used.

Furthermore, as Mitch Free, founder of MFG.com, pointed out, the recent changes, despite the fact that they are a big deal and will continue to be a big deal, are not all bad news. First of all, they present an interesting opportunity for American Suppliers to bet aggressive and start to bring business back home. They will need to employ advanced technologies and a great strategy to do this, but that’s not a bad thing. Furthermore, he also points out that this will force Chinese suppliers to elevate to a higher level of technology to compete, especially on lower value-add products, and this is good for everyone! Mitch, in responding to a listener question, also pointed out that a higher-value finished goods economy, like the one that matured in Japan and Korea is undeniably coming, but that the question is, as always, when. Due to China’s sheer size, it’s likely to take a long time. It’s also up to the government, who appears to be in total control of their market with their power to control exports, give and take VAT rebates, alter the value of their currency, etc.

This was a great webinar, and Lisa Reisman also had some great insights on how to properly assess and manage your China sourcing and low-cost country sourcing in general, but that’s the subject of my next post.

In the mean time, I’d like to point out, as re-iterated many times by moderator Jason Busch, that MFG.com is launching a learning center next week to address all of the issues with China sourcing at http://www.mfg.com/chinasourcing and that this will include an archived version of the webinar, additional information on the recent MFG.com poll, questions and answers to all webinar questions (including the many that they didn’t get to), and a slew of executive briefs on the relative issues with more to come as time goes on.

Until the MFG.com learning center goes on-line, you can read and re-read the Spend Matter’s* series on the subject in these posts:

  • Full Spend Matters Coverage: The China Sourcing Controversy by Jason Busch on July 5
  • Paris Hilton’s Dog Dead Due to Pet Food From China!!!! by Tony Poshek on July 5
  • China Sourcing: The Future Ain’t What it Used to Be (Post 1) by Lisa Reisman on July 6
  • China Sourcing: You Got ‘VAT? by Jason Busch on July 6
  • China Sourcing: The Future Ain’t What it Used to Be (Post 2) by Stuart Burns on July 6
  • China Sourcing: The Future Ain’t What it Used to Be (Post 3) by AJ Sweatt on July 6
  • China Sourcing: The Future Ain’t What it Used to Be (Post 4) by James Jin on July 6
  • China Sourcing: The Future Ain’t What it Used to Be (Post 5) by Jason Busch, Pat Furey, and David Morgenstern on July 9
  • China Sourcing: The Future Ain’t What it Used to Be (Post 6) by Paul Martyn on July 17
  • Anti-China Propaganda Canada Style by Jason Busch on July 10
  • A Last Minute Webinar: What’s Really Going on in China by Jason Busch on July 11
  • MFGx — The China Debate by Jason Busch on July 12

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Outsourcing Insights from PricewaterhouseCoopers

PricewaterhouseCoopers (PWC) recently released the results of their March/April 2007 survey of 226 customers and 66 outsourcing service providers on outsourcing in their “Outsourcing Comes of Age” report. Although quite lengthy (over 20 pages), it does contain a few good insights. Furthermore, given the complexity of outsourcing, and the conflicting claims we continually hear in the press, it’s important that studies of this sort be produced regularly, as its hard to form a justified opinion off of magazine articles that only tell us about the experiences of one particular company or outsource service provider.

This is a confusing topic because there is research that indicates many outsourcing deals collapse before the contract ends (and sometimes even before the contract is signed!), due to rising costs, lack of materialized savings, and mistrust. And they are right – most deals, especially in the early days (for the company doing the outsourcing or the service providers), do at least partially fail. Some analysts are going so far as to suggest that outsourcing is in a death spiral and that organizations will soon become disillusioned with outsourcing. Then you have the group of influencers and media pundits tirelessly heralding lucrative outsourcing deals, impressive benefits, and uncapped growth projections, often with 30% to 40% growth. And they are right – some companies do achieve that level of success. And the truth obviously lies somewhere in between. But where? And where does it lie for you?

What did PWC find? It found that outsourcing is growing in complexity, and that sophisticated leaders don’t fear that complexity – as the complexities of innovative partnering translate into the benefits of growth and performance. It found that outsourcing is as diverse as business itself, differing by country, sector, and even company – characterized by smarter suppliers, improved automation, and better-informed buyers driving toward long-term, sustainable, outsourcing arrangements. And it found that firms that effectively master the new complexities stand to reap the benefits.

PWC found that outsourcing is high on most companies agendas and that the major attractors are cost savings (76%), access to capabilities and talent (70%), and strategic benefit (63%). Sometimes a provider can do it better than you – and good firms use the best resources available, whether they be in house or not. PWC found that the most widely outsourced activity is IT services (57%), but that production or delivery is a close second (55%), and logistics a close third (51%). HR Services (35%), sales & marketing (33%), and innovation/R&D (32%), and procurement (30%) make up the middle tier. Call centers (25%) and finances and accounting (24%) round-out the bottom. It found that 27% to 55% of respondents (depending on the business function) plan to expand their outsourcing over the next five years and that there are three growth hot spots, finance & accounting (44%), customer call centers (45%), and procurement (53%).

The survey found evidence that customers need to rely increasingly on multi-sourcing and joint ventures and that successful customers are those that collaborate effectively with their service providers. To this end, the report presents two possible approaches to multi-sourcing, a lead supplier model, where one service provider functions as a general contractor who orchestrates other suppliers, and a collaborative partnering model, a collection of master partners governs the relationship, but more approaches exist.

They also found that although nearly half the service providers see employee opposition as a barrier to outsourcing, two thirds of the customers don’t see it that way. The report suggests two possible reasons: (1) vendors could be blaming employee opposition when the real issue is the business case and (2) customers are insensitive to the issue. I’d have to go with the second. Outsourcing is a significant change to the way you do your business, and requires sophisticated change management. You can’t just sign a deal and say “It’s the service provider’s problem now.”, because it’s not. It’s your problem – after all, it’s your business. It’s critical to get buy-in before you even start the negotiations with a provider, and have a transition plan in place – preferably one that results in as few layoffs as possible, with zero being the optimal number. (It can be done, Hallmark did it.)

Good outsourcing, especially in procurement, starts with the tactical and keeps the strategic in-house, at least at a high level. (For example, allowing your specialist serviced provider to strategically source your indirect materials is often a good idea, but giving up control of your critical direct materials is usually not.) This will significantly reduce the number of employees required to handle purchase orders, but that does not mean that it will significantly reduce the number of employees you need to effectively manage, and grow, your business or that getting rid of them is the best way to save money. If you’re an average company, with most of your spend not under management, the best way to save money is to train them to do proper sourcing and redeploy them on spend management projects to double or triple the spend you have under management and double or triple your savings (which should far exceed the cost of the retained resources).

One statistic that is particularly positive is the number of customers, 66%, who say that social and environmental issues will have a significant impact on their offshoring decisions. As long as they are not just giving lip service to the importance of corporate social responsibility, this is good news indeed. On the negative side, 52% of service providers believe that these issues are not important for their clients. I hope they get the message to “shape up, or ship out” before its too late. (Maybe PWC should arrange for them to get a visit from the Governator. )

PWC also found, not surprisingly, that there is a payoff for those that Collaborate, Collaborate, Collaborate, Collaborate. Emerging open business models are allowing firms to engage networks of partners and customers to generate higher value at lower costs and collaboration is yielding best practices in the capabilities and processes itself. Unfortunately, they also found that at this time, only 40% of joint governance structures are working effectively, indicating that many organizations and service providers still need to shape up and take a best practices approach both to collaboration and candour. PWC concluded by noting that a collaborative model of outsourcing is required to support buyers increasingly seeking to outsource core products to suppliers who want to rise to the challenge.

Catching up with Ketera

During my recent trip to the San Francisco Bay Area, I had a chance to catch up with Ketera (acquired by Deem), who have been working hard on improving not only their next generation spend analysis solution and on integrating their solution with Hyperion, as discussed in my March post, but on improving their catalog management, contract management, and invoice management integration, their reporting capabilities, and their supplier enablement solution.

Although they have one of the larger supplier networks, with over 115,000 users, it was a breath of fresh air to find out that Ketera understands that a supplier network in itself has no inherent value and that the real value is in supplier enablement. After all, if you’re a fortune 3000 company that’s been in business for tens or hundreds of years, you know who your suppliers are and who their competitors are and the supplier discovery mechanisms touted by supplier network providers really aren’t all that valuable to you. The value of a supplier network is the ability to electronically communicate with your suppliers, automatically send and receive purchase orders, goods receipts, invoices, and payments, and enable your suppliers to new levels of integration and productivity. Thus, the maximum value is obtained when all of your key and large-volume suppliers are connected to the network, and this requires a solution that is standards based, open standards browser compliant, easy to use and adopt, and capable of supporting the information that both you and your suppliers need.

To this end, Ketera is working on improving its supplier on-loading processes and solutions, adding interfaces to common back-end systems used by its customers (to complement its newly acquired SAP Netweaver Certification), and streamlining it’s document exchange protocols, mechanisms, and management tools. Ketera is also working on extending it’s catalog capabilities and punch out support and integrating price cross-checking with its contract management solution to improve compliance across-the-board.

Although I don’t expect any new releases or major announcements from Ketera until the fall, they’re certainly a company to keep an eye on. Not only are they one of the few companies in the space to offer integrated sourcing and procurement solutions on-demand, but one of the few companies that understand the benefits of helping their customers with whatever solutions they need and playing nice. For example, although they offer best-of-breed spend analysis, RFX*, and contract management solutions, their event management solution is weak and they don’t offer modern reverse auctions or decision optimization and they recognize that some customers will need these solutions. To this end, they partner (and re-sell) Iasta‘s solution to insure that customers that need the full range of eSourcing tools have them at their disposal. Combined with their fairly extensive e-Procurement offerings (which, from a basic cycle perspective, is only missing direct integration with leading payment providers and tax reclamation software integration), this provides users with one of the most extensive solutions in the marketplace from an integrated end-to-end e-Sourcing and e-Procurement cycle perspective.

Furthermore, I expect that before the end of the year, they’ll reach a point where they could start working on some very advanced and very interesting predictive cost baselining and modeling solutions that can only be built once integration is achieved to the point where holistic analytics become a possibility. This would allow companies that don’t have the extensive data required by Akoya (acquired by I-Cubed) or the physical process planning knowledge required by Apriori to tackle cost modeling and cost estimation in a way that they are unable to today. In other words, there’s still room for lots of innovation in the space, and Ketera is one of the few companies that I’ve talked to that might really break it open in the next few years by introducing new capabilities that can be used by the masses.

* Please read the comments! This was a typo. When their RFX capabilities are augmented with Iasta’s through their partnership reselling agreement, they compete with best-of-breed RFX solutions but, as Jason Busch points out, they do not on their own. My apologies.

Supply Chain Merger and Acquisition

In AMR’s (acquired by Gartner) “M&A: Designing the Supply Chain Response”, AMR presented a checklist on where to get started as an M&A approaches, with questions to jump start the process. The checklist can be summarized as follows:

  1. Before it happens, identify synergies.
  2. Carefully analyze opportunity against risk.
  3. Build capabilities.
  4. Design the supply response.

While a good article, and a great checklist, it seems to imply that the role of supply chain comes after a merger or acquisition has been defined, not before. For any M&A activity to be successful, there needs to be alignment between both the business goals and the business operations of the companies considering the M&A activity.

With regards to business operations, there needs to be alignment in sourcing activity, production activity, distribution activity, marketing activity, and day to day operations. With respect to day-to-day operations, there needs to be alignment between organizational culture. After all, the two companies are going to have to work as one.

With respect to sourcing, distribution, and cultural alignment, which department is better to judge alignment than supply chain management? Smooth operations are all about flow, inflow, people-driven process flow, and outflow – and flow is the domain of supply chain. Thus, supply chain should be involved in the process before a merger or acquisition is decided upon and the synergy identification and opportunity analysis should take place well before the decision is made.