Category Archives: Supply Chain

What does Finance Think of Procurement?

CFO Research Services recently produced a white-paper on “CFO’s Views on Procurement – Information, Risk, and Money”, sponsored by Ariba (acquired by SAP), that had some interesting insights on how some top senior finance executives view the procurement function.

The following are the points that I found most interesting in this 20-page study:

  1. improvements in cost management & decision support capabilities
    top the finance agenda
  2. companies see the greatest opportunity in managing external spending
    on production inputs and on indirect costs
  3. executives see greatest benefit from sourcing goods through preferred
    vendors and improving supplier interactions
  4. finance executives say their companies are unable to gather timely and
    accurate information on purchasing activities and have poor forward
    visibility on spending
  5. relationships with vendors are managed with combinations of technology
    and manual processes
  6. purchasing systems are not a cure-all, but companies that have adopted
    technology are better able to take full advantage of preferred providers,
    to find opportunities for savings, and to gather and use information;
    furthermore, in adopters, there are sustained differences in executives’
    views on the effectiveness of the procurement function and the quality
    of information that flows out of it
  7. many respondents cited a need for greater coordination and integration of
    the procurement function with the rest of the company
  8. some respondents noted the lack of an optimal sourcing strategy given a
    complex supply chain as well as difficulty with proper pricing, volume
    discounts, and vendor communication

These give me the following take-aways:

  1. Finance, even though they might not yet understand the procurement function in many organizations, can be convinced of its importance.
  2. This bodes well since Aberdeen’s recent Direct Materials Sourcing Study found that companies with best-in-class direct materials sourcing programs can achieve 28% year-over-year cost reductions and services like Rearden Commerce (rebranded Deem) and Noosh are popping-up to tackle various aspects of indirect costs
  3. This only emphasizes my points that you need to:
    Collaborate, Collaborate, Collaborate, Collaborate
    Collaborate, Collaborate, Collaborate, Collaborate
    Collaborate, Collaborate, Collaborate, Collaborate
    Collaborate, Collaborate, Collaborate, Collaborate
  4. This demonstrates the need for e-Procurement across the board.
  5. Companies need to invest more in Supplier Relationship Management and Collaboration Systems to increase productivity.
  6. This demonstrates the need for e-Sourcing across the board.
  7. The importance of center-led procurement and cross-functional collaboration emerges as the crystal ball clears.
  8. Great supply chains require Total Value Management and Best-Cost Country Sourcing at their foundations.

And even though the final page from the sponsor, Ariba, was mostly marketing, I have to agree when they state that The survey results are a powerful proof point that elevating the procurement function and its processes and information is critical to creating strategic business advantage.

Best Cost Country Sourcing and the Concept of “Riskturn”

 

Today I’d like to welcome Ashton Udall of Global Sourcing Specialists and the author of the Product Global blog [WayBackMachine].

Low cost country sourcing; high cost country sourcing; near-shore sourcing; home-shoring; off-shoring…keep ’em coming. The manufacturing and distribution industries are just starting to get interesting. It can be tough to keep up. But, you only need keep up with the best concepts out there. And “best cost country sourcing” is one of them. Merging the “best” of risk and return?

Michael Lamoureux of Sourcing Innovation recently wrote a post entitled Best Cost Country Sourcing. His post was based on BrainNet’s white paper, “Best Cost Country Sourcing”, which I have yet to find a working link to. But fear not. Michael has summarized some of the concepts and made noteworthy commentary:

Taken from the white paper:

…cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

I agree. Generally speaking, you get what you pay for. But you have to take it on a case-by-case basis and think of it in terms of your overall competitive strategy. If time to market is too important, or you need components that are very high quality and technologically sophisticated, or exposure of your IP could sink your whole company, countries further along the development path with higher costs might end up saving you money in the long run.

Two basic concepts found throughout business, risk and return, are critical to the supply chain and sourcing. The problem is, it’s much more fun to speculate about substantial returns and savings, than try to quantify, measure, and assess risk. Thus, risk, and potential sources of risk and their effect on return, often fall off the radar. Perhaps someone should coin the term “riskturn”. Wait…I just did. It follows the whole celebrity gossip magazine promotion of co-identity: two things fused together which we dream will never be broken up again. People-Magazine-reading 14-year-old girls and desperate housewives have their Brad Pitt and Angelina, “Brangelina”, or Ben Affleck and Jennifer Lopez, “Bennifer”. Now CEO’s and sourcing managers will always remember “riskturn” and know that risk and return are a couple made in heaven.

Back to sourcing … Michael astutely notes:

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

In my case, Michael is preaching to the gospel. It’s right on and it’s worth promoting this kind of information more. ChinaLawBlog did a post eloquently entitled “China Defeats Vietnam in Sourcing Smackdown” which covered a post I did “Offshore Sourcing: An Ever-Shifting Landscape, Part II”. In my post, I talked about the fact that many fashion apparel manufacturers that moved production to Vietnam to avoid the risky/costly quota situation with China, then had to gather up their threads and needles again and head back to China and other countries when the US government announced that they would be monitoring Vietnam’s fashion industry for possible anti-dumping actions. In the comments section of ChinaLawBlog’s post, he noted that huge multinational corporations which fall into $5 million mistakes in trying to source the lowest costs or be the first to enter developing markets is not a strategy for all to follow. His point being, a smaller company making a $500,000 mistake might be up the Mekong Delta without a paddle, because they just don’t have the deep pockets to absorb those kinds of mistakes from a financial perspective like MNCs do.

Chasing lower costs undoubtedly disrupted supply chains, and perhaps order fulfillment, for these companies when they had to deal with a more unpredictable trade relationship between Vietnam and the U.S. For smaller companies, disruptors like this could be devastating. Best Cost Country Sourcing for smaller companies would involve hedging risk by looking for lower overall costs (rather than lowest hard costs) in a country where things like economics, trade, supply, materials, and other things are more predictable. I believe China retains this position over many other countries for smaller businesses looking to source consumer goods. At the very least, it’s certainly a good place to start for many. In many cases, maybe the best…?

Thanks Ashton!

P.S. I expect the comments to start rolling in from Mr. Locke any minute now …

Global Apparel

Apparel recently published an article entitled “Globalization is Getting Us” that had a surprising number of insights on Global Supply Chain Management and best practices given the nature and brevity of the article. In brief:

  • Too many companies are still using FOB as their cost metric!When you go global, you also have to factor in tarrifs, duties, higher shipping costs, travel costs, additional personnel costs, and the costs associated with expediting or acquiring a product locally at the last minute in the case of delayed (or lost) orders.
  • Even those companies that use landed costs are still missing the big picture! When you deal with an off-shore supplier, in order to have an effective relationship, you need to make regular site visits and sometimes even have feet-on-the-ground in the country you’re buying from. These extra salaries, travel costs, and opportunity costs associated with lost time from project managers and executives flying back and forth on a regular basis can really add up!
  • Price doesn’t matter as much as you think if the brand and quality are strong and customers buy.Most of us will pay a few extra percentage points, and sometimes a few dozen extra percentage points if we know the product is a quality, supported product from a reputable company, especially if it employs sustainable best practices. After all, we drink Starbucks.
  • Those who source local can turn on a dime and refocus production if demand unexpectedly spikes for a certain product.American Apparel and Zara can get product out in less than a week. If you’re sourcing from Asia, a month would be incredible turn-around time.
  • It’s easy to customize full-package offerings on-shore. Full-package from offshore can be a lot harder.
  • Not enough American companies are exporting their products. In today’s Global Enconomy, America is second-class – the new class is international.
  • Corporate Sustainability has long-term economic benefits. In addition to the immediate cost-savings from energy-saving efforts, it creates brand loyalty, a foundation for future profits.
  • Smart companies overcome the technology addiction. Technology may be the key to the collaboration, efficiency, and visibility you need in your supply chain – but there is a difference between you driving the technology and the technology driving you. Successful companies identify exactly what they need and what a tool needs to do to be effective – and then find a solution that fits. Not the other way around.

Increase Competitiveness using Supply Chain Finance

In the April issue of Business Finance Magazine, Beth Enslow of Aberdeen Group penned a great article on “How to Create a More Competitive End-to-End Supply Chain” using Supply Chain Finance using Supply Chain Finance.

According to the article, by merging physical supply-chain information with financial supply-chain data and flexible funding methods, companies are able to not only automate payables and receivables but also to inject much-needed liquidity at various stages of the supply chain.

This gives the buyer the ability to:

  • Optimize Working Capitalthrough inventory reduction and A/P and A/R improvements
  • Reduce Product Unit Coststhrough arbitrage opportunities due to a higher cost of capital for many suppliers
  • Extra Days Payable Outstandingoften by over 50 days which can improve cash flow by hundreds of millions of dollars or decrease unit costs by five to ten percent

This is enabled by better visibility into order and shipment status and historical performance which allows financial transactions between a supplier and buyer to be assessed, securitized, and sold at a lower credit premium which often allows for an end-to-end reduction in the cost of goods sold. Furthermore, enhanced visibility will give buyers the option to finance at multiple points in the supply chain, including raw material production, intermediate production, point of shipment, customs clearance, and arrival at the vendor-managed inventory hub.

The article also described characteristics of best-in class companies in supply chain finance. These companies are:

  • more than three times as likely to use EIPP (electronic payment and presentment) systems as laggard companies
  • three times more likely to use an online payment platform with automated-discounting and invoice-reconciliation capabilities
  • twice as likely to extend payment terms and take part in an early payment discount program
  • more actively involved in using supply-chain financing techniques

In other words, leading companies take advantage of appropriate e-Sourcing and e-Procurement technology to maximize their potential.

Collaborate, Collaborate, Collaborate, Collaborate – Part IV

I know I’m taking the risk of sounding like a broken record (or for those of you too young to remember such a contraption, the effect produced can be mimicked by putting a mini audio clip on infinite loop), but the fact that articles continue to surface on the topic, and the fact that there appears to be a need for these article, leads one to believe that the message still needs to be spread. To this end, here is the fourth installment. (Need to catch up? Here are the links to C4 I, C4 II, and C4 III.)

So how can one foster collaboration? A recent issue of Computer Business tells us that “IT Makes Collaboration Easy”. This is important because a collaborative approach changes how people relate to each other and people to tend to resist change. Therefore, a collaborative culture cannot be forced on staff, and must be delivered in a way that allows them to become converts after experiencing the benefits for themselves.

The article points out that IT-based tools, if implemented effectively, allow collaboration to be built into everyday business processes, and carried out with the minimum of effort. These collaboration tools must deliver simple user experiences no matter how complex the implementation and underlying processes are.

“Looking Ahead: Faster, Brighter Technology”The importance of collaboration, and of technology that supports that collaboration, is echoed in by John Kerr, Contributing Editor of Supply Chain Management Review. In the article, he notes that Collaboration is Now the Rule and that new technology developments, such as SOA, will continue to accelerate collaboration among supply chain participants. These tools will help extend collaboration further out to functions that have only recently become part of supply chain management thinking, such as new product development and supply chain finance.

Finally, we find yet another perspective on the importance of technology in a recent European Leaders Network article that illustrates “How I.T. shows the way upward”. The article points out that communication is the key and technology is the key to global communications, essential in today’s global marketplace.

However, we can use more than technology to improve collaboration. A recent issue of Supply & Demand Chain Executive brings us an article by Nilesh Anand that gives us one direction for collaborative performance enhancement. In “Collaborative Performance Enhancement = Successful Supply Chain Management”, we are reminded that a supply chain is only as strong as its weakest link and told that the key to collaborative performance enhancement is collaborative benchmarking.

According to the article, a collaborative benchmarking effort starts by choosing effective performance indicators. Efforts are then made to measure them effectively. These indicators are identified by researching best practices and peer organizations that are doing above average. Make sure to cover delivery performance, flexibility and responsiveness, logistics cost, and asset management.

Collaborative benchmarking is important because it requires understanding between all participating members who are more likely to collectively take the whole supply chain into account, and not just one or two segments.

Once you have measurements, focus on identifying and implementing the appropriate best practices to improve them. Set goals for improvements and strive for continuous improvement – collaborating each step of the way.

So in conclusion, you can start to foster collaboration by way of the application of the right technology, the right measurement process, and in the identification and implementation of new and improved best practices and methodologies where everyone works together. Of course there’s more that you can do, but this is a great start!