Category Archives: Risk Management

Category Management: Getting it Right is Key to Surviving the Trade Wars Part III

The Trade Wars are here! Tariffs! Counter-Tariffs! Counter-Counter-Tariffs! Counter-Counter-Counter-Tariffs! Even online traders can’t trade that fast. It’s dizzying.

And if you’re planning didn’t start weeks ago, you have a lot of catching up to do. Because if you don’t, your business may not survive. Literally.

So far, we told you it was critical to:

    1. 1. Understanding your Current Costs in Detail
    1. 2. Understand your Tier 2 Supply Chain in Detail
    1. 3. Start By Identifying Alternative Supply Choices
    1. 4. Then Build Alternative Cost Models Around those Alternative Supply Choices

5. Re-Evaluate on Every Tariff Change

But this is not always enough. What if the majority of the rare earth metal comes from China and the cost is insurmountable for your business? You also need to:


6. Start looking at alternative designs that eliminate dependence on a single country.

You can’t be dependent on China, the EU, or any other locale that Trump is targeting. Costs could go through the roof.

Also, you can’t be dependent on certain transportation methods. If diesel costs go through the roof, long haul shipping is going to get considerably more expensive. It may actually be cheaper to do short-haul trucking from Mexico or Brazil if you’re selling in the US because you know that the US may subsidize your industry in other ways (with lower taxes or rebates for buying / shipping at home). Thus, you also need to


7. Start looking aggressively at near-shoring.

SI has been telling you for years that sometimes the best cost county sourcing is home country sourcing, and when that’s not viable, near-shore sourcing is becoming a better option again. Find alternative suppliers closer to home, just in case!

And, you better make sure their supply chains are secure.


8. Weed out near-shore suppliers that are actually getting most of their materials or doing most of their production remotely.

Remember, the entire point of trying to bring production closer to home to ensure affordable supply is to actually bring production back, not just source from a supplier that is just an intermediary that outsources on your behalf. That actually adds more time, risk, and cost to the supply chain.

Is this everything you can do? No, but it’s progress.

Category Management: Getting it Right is Key to Surviving the Trade Wars

The Trade Wars are coming. The Trump Tariffs are coming fast and furious, and the rest of the world is retaliating. So if you aren’t prepared, just about every category under your purview is about to get a LOT more expensive. A LOT more.

And while you’re not likely to thrive, because no one wins a ware, and no one comes out unscathed, you can survive — with care and planning. So what do you need to do?

1) Understand your Current Costs in Detail

Build detailed total cost of ownership cost models for all of your significant (cost/volume) or strategic purchases as if they direct purchases. The costs should be broken down into the components and raw materials that constitute at least 80% of the material cost, and, if possible, energy and labour costs should be broken out of the overheads. Done right, when you add in the “fair” margin, you have the expected unit cost.

On top of this, you add in the transportation costs, surcharges, non-recoverable taxes, import & export charges from source to sink countries, and defect/waste costs.

And this is why we noted you needed talent that could do modelling and use platforms that could handle it is important. But this is just the start. Sometimes the tariffs will be imposed on the product level, but sometimes on the material level. So, that’s why you have to …

2) Understand your Tier 2 Supply Chain in Detail

It’s not just what you’re buying and where you are buying it from, it’s what your suppliers are buying and where they are buying it from. If you’re buying your assemblies from Germany, and 15% tariffs get smacked on assembly imports, that’s a 15% increase. But that’s not the only increase you could be subject too. Maybe Germany is buying the bulk of the raw materials from China. What if Germany decides to smack 15% to 20% tariffs on almost all of the raw materials being sourced from China? Which constitute 60% of your supplier’s costs? Then their costs will go up 9% or more, and guess what’s going to happen to your costs? They’re going to go up another 9%. And you won’t know it until you get the bill!

But if you understand your Tier 2 supply chain you can know when your suppliers are going to get hit with new tariffs, and when they are going to pass on those tariffs to you. You can proactively question them if they are going to switch suppliers, and work with them to find alternative sources of supply without tariffs, or which have a lower overall total cost of acquisition than the sources of supply they are using now.

And this is why we noted you needed talent that had commodity market expertise and negotiation capability as well as a platform that could integrate real-time market data (including tariff changes) and supplier performance management.

But this is just the beginning!

Stay tuned!

Category Management: Getting it Right

As we have posted regularly, the first step is to solve the classic Triple T problem:

  • Talent
    your organization must have the right talent to properly manage your category-based initiatives
  • Technology
    your organization must have the right platforms to capture the right data and support the right processes
  • Transition Management
    your organizations must have the right processes in place to handle the necessary organizational shift to properly manage the initiatives as markets, needs, and workflows will change over time

Only once the talent, technology, and transition management is in place, will the organization have what it takes to fully embrace the initiative. And do it right. At some point we will revisit each of these requirements in more detail, but today we’re going to outline what these requirements are at a high level so that we can dive into a few key aspects that are important with the looming Trade Wars on the horizon.

So, at a high level, where should your Supply Management Organization start? By focussing on the core capabilities that are required in each “T” category, many of which we are outlining in this post. And, more importantly, finding the right talent, technology, and transition management plan that fits.

Talent for Category Management

Good category managers need at least the following hard and soft skills:

  • Analysis
    to determine the volume and spend in the category
  • Modelling
    to determine the major cost components, and cost drivers, of the major products or services in the category
  • Commodity Market Expertise
    in the major raw materials and commodities used in the production of the major products in the category
  • Stakeholder Management
    as savings and performance improvement will usually come from consolidating related items with a smaller set of suppliers, which is going to ruffle some feathers when some departments lose their coveted suppliers and supply relationships.
  • Negotiation
    since not only will the individual need to consolidate a set of commodity purchases with a single supplier, but the individual will also need to cut a good deal and maybe even convince the supplier to take some business it normally wouldn’t want
  • Change Management
    since good category management typically requires changing the way the organization conducts business today

Technology for Category Management

Appropriate technology platforms for category management will have at least the following features:

  • Spend Analytics
    with extensive aggregation, cubing, and filtering capability
    as the category manager needs to not only extract volume and spend, but identify related products and services based on components, raw-materials, and sub/related services
  • Should Cost Modelling
    which allows the category manager to understand not only what the product should cost but the primary cost components and the appropriate inputs to an optimization model
  • (Real-Time) Market Data
    which allows the category manager to track historical market trends and predict future prices to time the market if prices are volatile
  • Supplier Performance Management
    which allows the category manager to track and manage supplier performance
  • RFX
    to manage the data collection and track supplier bids and responses before and during negotiations

Transition to Category Management

In order to transition to proper category management, the organization needs to hire someone with good change management skills and give that person the tools he or she needs to get it done. That person also needs to be a natural born leader and someone who can work with teams to get it done. Then, that person needs to identify a change management methodology and adapt it to organizational needs. And, most importantly, get buy in using the aforementioned natural born leader and workforce harmonization skills.

This isn’t a complete (laundry) list of what is required for successful category management, but it’s a good starting point. Get the right talent, technology, and transition management in place, and your organization will be well on its way to category management success. More details to come! Especially with respect to the looming trade war!

It’s Not Our Fault if Stupid Suppliers Bid Too Low But …

… it is our fault if we accept an unsustainable bid.

Over on Spend Matters UK, the public defender wrote a very thought-provoking post that asked is Procurement responsible if suppliers are stupid and bid too low?

And the doctor has to agree with the conclusion that we are not responsible for suppliers’ stupidity, only our own. And accepting any bid that is not sustainable is, generally speaking, a stupid decision, at least without a plan to make it sustainable.

In the doctor‘s view, it’s not good enough to just have contingency plans in place. If a supplier goes into bankruptcy, and publicly blames you for forcing them to accept an unsustainable contract that is bankrupting them and forcing them to lay off hundreds, or thousands, of workers, that’s not good PR. It could hurt your brand, your sales, and your chances of striking a good relationship with a new supplier who will be wary of the corporate [job] killer.

While it’s your job to find, and get, the deal that is too good to be true, you want to be sure that the deal doesn’t bankrupt the supplier, at least not until the contract runs out. So if you know the supplier will lose money as is, you need to figure out how to make sure that you figure out how to stem the bleeding sufficiently over time to prevent bankruptcy or failure.

For example, if you know, based on raw material price trends, the COGS for the product you are buying will be at least 5% more than what the vendor is quoting, have plans in place to reduce that cost as soon as the contract is signed. Either develop lean improvement plans to reduce all overheads cost as a temporary stop-gap, buy raw materials in volume on behalf of the entire supply base to lower cost, and start work on alternate designs that reduce high-cost raw material requirements if costs get too high.

If you plan ahead, you can be careful not to accept any bid that you cannot make sustainable for the supplier with at least one of the above plans. You don’t have to make the supplier profitable, although if you take the supplier beyond breakeven to profitability it may make you a customer of choice and that can have a number of benefits beyond just the unbelievably low bid you scored, but you have to be able to prevent the supplier from going bankrupt.

So don’t worry about supplier stupidity, just worry about not catching foolish fever. Then you can score big, and not suffer the fate that comes with failure in your supply chain.

There Are At Least 12 Risk Disconnects … but One You Should Never Overlook!

Over on Spend Matters Pro [membership required], the maverick is running a 12-part Pro series on The 12 Supply Risk Disconnects that Destroy Value that you really should check out. These disconnects not only increase Procurement and Supply Management risks across the board, but often end up destroy all the hard-earned value Procurement tried to extract from the sourcing event or push into the contract.

All of the risks are important, but the most critical in SI’s view is the disconnect between risk and cost. Why?

  1. Not only can one identifiable supply chain disruption not only wipe out all the savings, but increase cost beyond the current solution but
  2. Only an understanding of the true cost of risk will convince most stakeholders and executives to look beyond cost, reliability, marketing differentiation, or whatever else matters most to them. Money talks, and (potential) loss is the one thing that gets noticed.

As the maverick points out, supply risk basically overlays the dimensions of external VUCA (volatility, uncertainty, complexity and ambiguity) on top of the quality value stream and you have to minimize TCO in the face of varying levels of risk. This creates the challenge of how to place a price tag on that risk and another price tag on the cost of mitigating those risks, which is driven both by the outside-in risk you face and also your current level of risk management capabilities. Which is easier said than done, but without a solid understanding of the cost of risk, and an ability to model it against the cost of a buy, you can’t truly optimize your overall total cost of ownership, of a potential buy.

But you need to, and you need to acquire an optimization-backed sourcing solution to model the true cost of each option to make risk-aware Procurement decisions. Because then, as SI pointed out in an earlier post, you can not only Define [True] Procurement Success, but enable it.