Category Archives: Risk Management

Global Trade Data Management

We’ve discussed Global Supplier Visibility and Performance, Supply Chain Finance, and even Supply Chain Audits, but we have not yet delved into Global Trade Data Management, an area that, if mismanaged, can cost you millions of dollars.

Why? Maybe it’s because if it’s done properly, there are no considerable savings opportunities when compared with other areas of the supply chain. With visibility, there are always new ways to manage risk that can be significantly more cost competitive. With finance, new payment methods or arrangements always present noticably increased potential. With sourcing, we know where the enormous opportunities are. With global trade, governments fix tariffs and duties and that’s that.

But only if your items are property classified and validated and only if you pay the right amount. The reality is that, in many corporations, error rates in global trade processes approach 10% to 20%. The effective control of global trade processes is often 100 to 200 times worse compared to accounts payable processes in the same company.

Why? A combination of reasons. Up until 1993, the government was responsible for reviewing the accuracy of documentation and markings and assessing appropriate duties. Then the Customs Modernization Act shifted responsibility for import compliance to the importer. Businesses were not ready, so they deferred to third-party providers (customhouse brokerage services). But as they expanded, so did the broad range of countries and commodities they had to processes, as well as the ever increasing range of HTS (Harmonized Tariff Schedule) codes they had to deal with, many of which had confusing sub-classifications that were not well known or commonly used. In addition, whereas accounting had a number of sophisticated accounting systems to choose from on the marketplace, technology solutions for these customhouse brokerage providers were almost non-existent. In effect, proper classification depended on the expertise of the human classifying the data – which leads to errors, all of which are costly since they will result in delayed clearance, fines, or undetected overpayments – the last of which the government is not looking for on your behalf.

How could this happen? Many categories have subcategories. Consider 3703.10, photographic paper. It’s US HTS rate is 3.7% unless it’s 3703.10.60, Other (not falling into the .30 category of rolls exceeding 610 mm), and then its 3.1%. If you were unaware of this special subclassification, or simply left off the .60, you’d be paying 0.6% more. Another common error is a mixed shipment where a rushed or lazy agent simply uses the high level four digit code in a mixed shipment. If the majority of the shipment was at a lower rate, or was subject to reduced rates because of a free trade agreement or free trade zone, you could be considerably overpaying. And if you’re importing 50M and overpaying 2%, that’s 1M you’re losing.

So what can you do? Up until recently, the best you could do is subscribe to a service that kept up-to-date rates and manually verify each shipment against the rates, which required lots of manpower and might cost more than you save if you are a mid-sized company or smaller. Today, there are technology solutions to assist you. One such solution is that offered by Global Data Mining [GDM] (acquired by Customs Info, acquired by Descartes), a company that specializes in helping high-volume, high-value global trade businesses build effective trade databases for extensive trade reporting and comprehensive auditing to significantly improve their processes, reduce their error rates, and save time and money in their global trade endeavors.

Earlier this week I had a chance to speak with the president of GDM, and the president of their sister company, International Trade Bureau and I must say that I was impressed with their knowledge of the issues in the global trade space and their processes and solutions for addressing them. Although they do not provide a complete solution on their own, with the right internal team and consulting partners, the foundation their solutions provide will allow you to address your trade issues end to end. How? That’s a topic for a later post.

Sometimes Good Advice for IT is Good Advice for Sourcing

A while ago, ZDNet published a short article that described a “10-Step program to SOA Success”. What’s neat about this article is that it could have been titled 10-Step Program to Sourcing Success as it is a great primer if you are just entering the world of e-Sourcing.

Let’s examine the ten steps carefully.

  • Who’s Your Daddy?
    Without support, any project is doomed to failure. If your organization does not yet have a Chief Procurement Officer on the senior management team, you need to find someone in senior management who is responsible for a top business imperative and convince them the project will save money and let them champion your cause.
  • Have a Vision!
    You need to articulate your vision regularly and consistently to gain support from other teams, departments, and upper management. You’re implementing the foundations for sweeping business change that is going to affect the business for decades to come.
  • Identify Attainable Projects.
    Start with an initial project that has immediate value and that can be finished in a few months since nothing speaks louder than a successful project delivered on time with better-than-planned savings.
  • Support the Business.
    If you choose the projects with the greatest potential impact to the business, you will ensure that your sourcing projects get the attention they deserve.
  • Flexibility Matters.
    Create flexibility through loosely coupled on-demand services that can be formed to create composite applications that automate business functions across the sourcing and procurement cycles. This flexible infrastructure will form the basis of business processes that are capable of adapting quickly as markets change.
  • Networking is Not Just for Salespeople.
    A key to success is the establishment of corporate-wide support at all levels of the organization. Be visible, promote your success, and find a way to make your success their success.
  • Don’t Lose Control.
    Establish strict governance procedures from the outset. With stringent government regulations, organizations need to be acutely aware and be held accountable. In sourcing terms, this means documenting each step of the process and ensuring compliance with negotiated contracts.
  • Don’t Fear Change.
    Organizational changes are imminent and you should be prepared to not only adapt to them, but guide them. After all, procurement is a central business unit in a successful organization.
  • Learn as You Go.
    Even if the first projects go very well, which they can if you use good tools, best practices, and follow the advice of experienced category professionals (that you should consider hiring as consultants if you do not have the expertise internally), there is always room for improvement. The most successful aspects should be recognized, captured, and carried to the next project while the less successful aspects should be identified and improved.
  • The Best and the Brightest.
    Create a center of excellence and staff it with the best and brightest. This team will be responsible for identifying best practices and guiding your procurement teams in their implementation.

There’s Such a Thing as Too Much Flexibility (in your Make-to-Order Supply Chain)

As you have hopefully figured out by now, there were a lot of good presentations at the Fourth Annual International Symposium on Supply Chain Management. Some were more insightful than others, some more interesting than others, and some more eye opening than others. A presentation that fit into this last category was Sascha Schoor’s presentation titled Flexibility Cost Oriented Management of New Car Orders in the Automotive Industry.

German premium car manufacturers differ from other European manufacturers and American manufacturers in two distinct areas:

  1. build to order
    almost 100% of cars are configured by customers or dealers
    (as opposed to 48% in Europe and 6% in the US)
  2. individual configuration
    there are theoretically up to 1032 different configurations of a BMW5

This is because German manufacturers believe that consumers not only want a significant amount of customization capability in their cars, but that customers also want the flexibility to change their order up until a few days before production begins – the “5 day car” model. However, the study carried out by the presenter determined that despite marketing’s insistence that being able to change an order up until 5 days before production was very important to consumers, this is not the case.

The study, which analyzed responses from 803 participants, 508 of which planned to buy a new car in the next 12 months and 295 of whom had recently bought a new car, found that the majority of customers would not only be satisfied with a longer delivery time and, thus, a reduced capability to change an order once it is made, but that a substantial number would be willing to accept a significantly longer delivery time if an early booking rebate was offered (with 69% willing to lock in an order early if a 5% to 10% rebate was offered).

When you consider that

  • only 13% of customers change their orders after signing, and of these, the median number of changes is less than 2%
  • a total of 85% of these customers would accept a longer delivery time with an early booking rebate,
  • most of the changes revolve around easily configured electrical components (i.e. stereo/CD), interior choices (seats, color), and exterior choices (paint, optional accessories), and
  • having your orders locked down a few days in advance allows you to configure your production lines for optimal productivity, which can greatly lower your costs

it becomes clear that German manufacturers could save a lot of money and substantially increase profits by adopting a happy medium between the German car philosophy and the American car philosophy and providing rebates for those customers who lock in build orders early or choose a standard configuration. Then, for the 15% of customers who want flexibility, they can still provide that flexibility at a premium.

What do you think?

The Change Management Myth: Why e-Procurement Initiatives Fail

One of at the presentations that I really wanted to see at the Fourth Annual International Symposium on Supply Chain Management was Jon THE REVELATOR Hansen’s presentation on The Change Management Myth: Why e-Procurement Initiatives Fail. Unfortunately, as happens from time to time, the author could not make it. However, Jon Hansen, formerly of e-Procure Solutions Corp. (and now of Procurement Insights), did send in the paper his presentation was to be based on, which had some really good points that I am going to discuss herein.

Before I get to what may be the fundamental reason, I’d like to reiterate a statement by Dr. John K. Potter who stated in his eight step process for change (in Leading Change) that transformation within a company can take between 5 and 10 years while, conversely, employees will abandon the initiative if the do not see compelling evidence that the change is working within 12 to 24 months. In other words, major organizational changes typically take 2.5 to 10 times longer than an employee will wait – so the pace of change, and your change management, needs to be relatively rapid if you want to succeed.

Secondly, I’d like to point out that despite their potential to revolutionize your organization, e-Procurement failures, especially partial ones, are much more common than you might think. Studies (IDC) and publications (Fortune Magazine) have reported that 75% to 85% of all e-Procurement initiatives fail to achieve the expected results. In other words, according to these studies, your chances of complete success are at most 1/4! Those aren’t good odds.

As an example, I’d like to point out the results of INCO’s eProcurement Transformation. At the conference INCO, one of the world’s largest nickel producers, presented the results of the initiative they started in 2001 (primarily through Quadrem (acquired by Ariba in 2011) an eProcurement marketplace) as a success. However, given their reported results, I would only classify it as a partial success.

As of last year, INCO calculated that their eRFQ initiative has saved them $3M on 907 events worth $300M – a mere 1%! If, like me, you’ve been tracking the industry studies by Aberdeen and AMR over the years, you will find this quite low. Now, an eRFQ initiative is not going to save you double digits like an eAuction or decision optimization can, but, considering the size of their organization and their spend, I would have expected efficiency savings at least 2 or 3 times that amount.

Furthermore, they have only run 26 events to date for a savings of 17M! Now, I don’t know all the baselines for this statistic, but I expect that their savings could have been a lot higher with more events. After all, industry statistics would suggest that they could have run considerably more events than they did (since at least 30 to 50% of events should be suitable for their eAuction tool and they have been running 180+ events a year through their eRFQ), and doubling or tripling the events should significantly increase savings. After all, their public financials indicate capital expenditures of almost 1.2B a year, and given average first time auction savings typically in double digits, if they had run even a third of their spend last year through an eAuction, I would conservatively expect that they should have been able to achieve a savings two times what they actually did. I could be dead wrong, but I’ve seen some considerable successes first hand when projects are appropriately implemented, managed, and, most importantly, supported. (And I’m sure the change management and the slow pace of a large corporation was the issue for the long implementation and what I consider to be weak results, and not the technology or their procurement team, who struck me as very on-the-ball.)

Back to the topic at hand. Most initiatives fail to achieve the expected results. (And sometimes drastically so! Consider the State of California who entered into a 6 year, $95M contract with Oracle on the basis of an unverified vendor savings estimate of $163M, which was not backed up by the $111M estimate by Logicon, Oracle’s consulting partner. When the deal was audited by the State’s auditor, the forecasts were found to be wildly inaccurate and the conclusion was that instead of saving money, the 6 year, $95M contract would actually cost taxpayers $41M.

The major reason, as hinted at by the above example, is typically lack of technology alignment. I’m a technology guru by training (PhD in Computer Science specializing in Multi-Dimensional and Spatial Data Structures and Computational Geometry), and I know (from experience) that great technology, including technology with a multi-million dollar price tag, can produce an ROI many times what you invest – but the truth is that it only produces results if it is aligned with your needs and solves the problem you need to solve. More importantly, even though the right solution can often save you millions and millions of dollars, the wrong solution can cost even more!

So why is the wrong technology often selected? There are a number of reasons for this. One reason, as I inferred in the software panel at the conference, is that the decision is not always made by the right person, but the primary reason is probably due to a lack of strategy. If your strategy is to simply “select an eProcurement / eSourcing tool” and reap rewards, you are bound to fail.

As Hansen says, any e-procurement strategy should be built upon a solid foundation of process understanding and refinement before technology is introduced into the equation. This way, when you make the decision to investigate the available applications, you are doing so with a clear understanding of how technology can work to accelerate the process, not define it. In other words, you need to know what you need before you select a solution, so that you can properly evaluate the solutions on the marketplace and select the one that is best matched to your needs.

Key Concepts for Major Procurements

In the humble opinion of the doctor, one of the best presentations at the Fourth Annual International Symposium on Supply Chain Management was Paul Emanuelli’s presentation on Key Concepts for Major Procurements.

Most of the time in procurement, you’re procuring orders of direct materials, indirect materials, MRO, or services – basic acquisitions which, with a few notable exceptions, will not break the bank if something goes wrong. However, sometimes your purchases are bigger – much, much bigger. For example, a new office building. A new fleet of aircraft. New heavy machinery. These procurements, if not handled properly, could, literally, break the bank, and the business, if not handled properly – possibly even before the law suits start flying.

The very nature of major procurements implies that legal counsel should be involved from day one – not brought in during final negotiations. When you consider Mr. Emanuelli’s checklist for empowering major procurements:

  • The Role of Lead Legal Counsel
    • Expanded in Major Procurements
    • Embedded in a Multidisciplinary Team
    • Multi-Faceted Legal Advice
  • Internal Governance
    • Awareness of Internal Governance Issues
    • Approvals Roadmap
    • Decision Making Framework
    • Roles and Responsibilities
    • Distinguishing Internal and External Audience
  • Plans and Strategies
    • Providing Strategic and Tactical Advice
    • Distinguishing Process from Purpose
    • Building a Business Plan
    • Developing a Procurement Strategy
  • Selecting the Appropriate Format
    • Critical Decision Point
    • UN Model Procurement Law
    • Three RFP Formats
    • Selection Depends on Circumstances
    • Impact of Pro Forma Agreement
    • No Negotiations Calls for Certainty of Terms
    • Criteria for No Negotiation Format
    • Major Projects Require Flexibility
  • Critical Project Details
    • Front-Line Considerations
    • Disclosure Duties
    • Reconciling Requirements
    • Coordinating Concurrent Drafting
    • Horizontal Integration
    • Tailoring a Legal Agreement
    • Developing a Negotiating Strategy

… it quickly becomes obvious that legal counsel is crucial from day one.

In order for a major procurement project to succeed, roles and responsibilities must be hammered out from day one. This is where good legal counsel can be of significant assistance. They can help you identify all internal stakeholders and create a solid decision-making framework and governance structure to provide direction to the cross organizational procurement team during all facets of the project.

Solid legal counsel can also help you distinguish process from purpose, separating the means from the ends, which assists you in drafting documentation that clearly differentiates between the procurement process rules that lead to the selection of a preferred service provider and the objectives that should be achieved under the contract once awarded. Unclear language alone has been the basis for a slew of lawsuits north and south of the border, especially in the public sector, and well drafted documentation up front effectively mitigates your risk.

Legal counsel can also assist in the creation of a solid business plan at the beginning of the project as well as the definition of a customized procurement strategy tailored to the project, including the selection of an RFP process and associated drafting. This will also help prevent problems down the road.

When it comes to RFPs, you essentially have three options, as recognized by the UN Model Procurement Law:

  • No-Negotiation RFP
    invitation to tender style commonly used in the public sector
  • Simultaneous Negotiation RFP
    allows the purchaser to negotiate with all bidders
  • Consecutive Negotiation RFP
    allows the bidder to negotiate with the highest ranked bidder and proceed down the ranking until an agreement is reached

The No-Negotiation RFP is one of the strictest formats and requires absolute certainty of terms in order to prevent problems down the road. Considering that it needs to:

  1. include all of the general governing terms and conditions;
  2. incorporate all of the purchaser’s business and technical requirements;
  3. enable bidding based on the same set of common assumptions regarding performance terms and conditions; and
  4. enable contract formation without recourse to any post-bidding negotiations that materially change the terms contained in the tender call;

I would submit that you should never embark on any significant no-negotiation tender without the advice of legal counsel from the beginning. In summary:

The complex and multi-faceted nature of major procurement projects requires legal counsel to play an intensive role in the project team. By integrating into that team and understanding the broader context within which these project operates, legal counsel can be a key contributor to the success of a project. To increase their chances of success, project organizers would be wise to retain this key player at the early stages of their major initiatives.

For those of you in the public sector, Paul Emanuelli has recently produced a textbook on Government Procurement and, even though it was written from a Canadian perspective, I would suggest that the advice is sound whether you are in Canada, the US, the UK, Australia, etc. Paul also produces a free quarterly National Tendering Law Update which can be electronically subscribed to on request to paul<dot>emanuelli<at>sympatico.ca.