Can You Solve the Modern Compliance Challenge? Can Ecovadis?

Compliance used to be easy. Collect the tax information. Make sure the other party is not on a denied party list. Don’t buy or sell a restricted material without the right permits and don’t buy or sell a banned substance. Done.

But then came globalization. Now you had to collect information for import / export requirements. Satisfy a new slew of tax regulations. Comply with additional inspection and security requirements. Track all of the restricted substances, denied materials, and denied parties of another country. And then as supply chains lengthened and ships made multiple port stops, multiply these requirements.

And that was manageable, but then came a new round of financial regulations, like SOX, in the wake of corporate meltdowns (like Enron) which made compliance more cumbersome. And that was somewhat doable. But with the global penetration of the internet, news spread faster and faster and the unsafe and sometimes inhumane working conditions that outsourced providers were comfortable with made the news regularly, the dangers of poor “recycling” efforts which just saw almost toxic waste dumped on mass to ill-equipped “recycling” centers, and the use of slave/child labour where it was not known before.

As a result, ethical countries started implementing laws on environmental protection, dangerous substances, especially around recycling and disposal, ethical and safe working conditions in the supply chain, and even anti-trafficking and anti-slavery laws — all of which the last link in the chain, the end buying organization, was responsible for.
This makes compliance a bit more tricky. There’s lots of data on financial performance and financial risk, certifications, import/export, and even public sector performance data, but when it comes to corporate social responsibility — environmental compliance, worker’s rights, anti-trafficking, and so on – where do you get that data. Not D&B. Not BvD.

This is where a new generation CSR player comes into play – one that tracks environmental data, sustainability data, social compliance data, and third party audits. But there aren’t many players here yet, and Ecovadis is the largest. But will they be able to take their European success and globalize? While there are a few other players in Europe (Sedex Global, FLO-CERT, e-Atestations, etc.), there are few, if any in North America.

Ecovadis likely has the best shot, especially with their ever-increasing partner footprint, but they need to be the first to scale and win over the hearts (and wallets) of global procurement organizations, especially those in North America, which generally are not as advanced around CSR tracking compared with their European counterparts. The road ahead will be interesting to watch.

Reuse, Recycle, Re-manufacture … Now! (Updated)

Sourcing Innovation has been promoting sustainability since the beginning and design for recycle since the very early days, which is essentially what you are doing if you are designing for remanufacturing, which is taking way too long to take hold in the manufacturing sector, with even fashion poised to overtake it (considering H&M and Zara are not only taking back clothes, but working on technology to create fabrics that can be more easily reused in the future).

When you think about the average complexity of today’s consumer products, especially in electronics, it becomes clear that when a product breaks, it is typically only one component that is broken and a replacement of that component makes the product useable again. That’s why a lot of computer, tablet, and phone manufacturers have entered the refurbishment business — once the damaged or defective part in a product that was returned under warranty or reclaimed upon disposal by a customer, it can be reused and, more importantly, resold.

But the concept doesn’t end with electronics, and doesn’t end with refurbishment. Electronics can be designed more modularly with re-manufacture in mind, so that parts can be upgraded en-masse when the products are returned en-masse in a regular upgrade cycle. For example, if laptops were designed for easy replacement of not only memory and drives, but processors and peripheral connectors (in anticipation of USB 4, Thunderbolt 2, etc.), the previous generation models could become the next generation models and resold as either lower-end offerings in the same market or new offerings in a foreign, emerging market.

And automotive suppliers, who not only know that parts wear out, but when parts are likely to wear out, and which parts wear out together, could not only design their engines to make it easy to replace parts, such as spark plugs, batteries, belts, filters, and pumps that wear out quickly, but also the engine block as a whole, that is going to wear out in 7 to 15 years, depending on the average annual mileage, if the rust-proof frame can last for 15 to 30 years. Given the choice, many people on a fixed income (who don’t live by the ocean and have rust to worry about) would rather replace the engine for 3,000 to 5,000 and keep the car for another 7-10 years if the frame is fine than pay 25,000 or 30,000 for a new car. And while this may not look as attractive from a bottom line perspective to a manufacturer, it significantly reduces the chance of the customer migrating to a different car company, which is very common if a competitor is offering a significantly better deal on a comparable car.

Plus, if the components are themselves designed for remanufacturing, it will be relatively easy for the manufacturer to reclaim the raw materials from the damaged or defective components, which is where a lot of the cost comes in, especially if we are talking rare earth metals. For example, the price of praseodymium-neodymium oxide exceed 1.70 an ounce and prices of terbium oxide (a semi-conductor that is used as an activator for green phospors in colour TV tubes) exceeded 112.00 an ounce this summer, and it keeps rising!  Gold, a metal used in many electronics products, is now hovering around $1500 an ounce. And while there is not much gold in a single laptop, when you put fifty of them together, you’d likely get an ounce. And given that there are roughly 100 Million PC laptops and computers sold a year, that’s close to 2 Million ounces of gold that need to be reclaimed!

And, as per a now classic green & clean article, remanufactured products offer cost savings in the 45% to 60% range! So if doing the right thing isn’t enough, that should be enough of a justification to invest in remanufacturing! This goes double if you are in electronics (for some of the reasons given above) or automotive, where the global market for remanufactured auto parts is projected to reach $91 Billion by 2026. (Source:
Persistence Market Research)

So, regardless of what you want to call it, it’s time to do it. It’s not just good environmental stewardship, it’s good economics.

Futurists are Still Stuck in the Past! Leave them there!

And the reasons are the same as they have always been.  (And the doctor just wishes they’d stop speaking at the events he has to go to.)

  1. They Have No Knowledge as they come from different backgrounds which offer them no education or experience in Supply Management.
    Just because you can get high, have psychedelic visions, white them down, and spin a good yarn doesn’t mean you can be a futurist. A poet, sure, but not a futurist …
  2. They Have No Vision beyond what the rear view mirror (or the hydrocarbon gas from the bituminous limestone) offers them.
    When Meatloaf said “it was long ago and far away and it was so much better than it is today“, he was referring to newly discovered young love, not business processes identified 30 years ago …
  3. They See Too Many Organizations Stuck in the Past and a few organizations (in the Hackett top 8%) ahead of the pack and they think they can peddle these best practices as future vision.
    This is not 1914 (which was 12 years before the first transatlantic telephone call) where good ideas take years to spread (and the first person to bring a new idea or technology from a different continent can make millions on someone else’s work) and a career can be built on one single improvement — this is 2019 where it only takes a few seconds for a story to be spread around the world. But I guess if you can’t look beyond the rear-view mirror …

So, why are so many organizations still stuck in the past (and fueling the flame that powers these fantasy futurists spinning the same yarns they spun five years ago and driving the doctor mad)? There’s a few reasons, and they include:

  • Lack of Education
    Many Supply Managers were simply thrust into the role, with no training or background for the role. And despite the fact that they have some competence or experience in other areas, they are so ill-equipped and ill-prepared for the role that they might as well have been dropped in The Lost World.
  • Lack of Resources
    Most Supply Managers are overworked (and underpaid, but who isn’t these days) and resource-constrained, with no time for training and no budget even if they had the time (or would sacrifice their few remaining free hours to get better and more efficient so that maybe someday they can take a whole weekend off).
  • Lack of Clarity
    With no formal education, no training, and no resources to make sense of the barrage of BS being thrown at them by futurists and analysts alike, how can they differentiate between current and past processes and technologies and what they need to embark on a path that will ready them for what comes next?

And the third reason is the most crucial. Until they get some clarity, Supply Managers are going to continue to be taken in by modern con-men (who include 2nd rate analysts, consultants, and salesmen of outdated technology) selling them silicon snake oil when they just need modern sourcing and procurement tools that fit their workflow and daily needs.

That’s why SI is here – and why the doctor co-invented (and single-handedly developed the sourcing, supplier management, and analytics) Solution Maps which grade a platform on functional capability only — not subjective vision, market size, arbitrary inclusion parameters, and other factors that are easily embellished or hidden behind a smoke screen.

So if you want a vendor who can help you, chose one based on solid capability.  And if you want an analyst that can help you, choose one that bases recommendations on real data.  Then you will make progress.

Aspects of the Tax Efficient Supply Chain

Many companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts — especially now that tariffs are skyrocketing and you need every source of savings you can find.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact income-based taxes), it has far reaching implications. Furthermore tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that have been noted on this blog in the past include the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states / jurisdictions, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications.

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information.

    • there are state income tax implications wherever such data is stored and maintained.
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items
  • identifying taxes that can be reclaimed

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made or the corporation is entitled to a tax rebate / refund
  • greater certainty regarding tax requirements

So get tax efficient. And maybe you can at least counter all of the duties and tariffs being imposed in the trade war.

Molly Fletcher’s 5 Mistakes Everyone Makes in Negotiations

Yesterday at Jaggaer Rev 2019, the best presentation was the guest keynote speaker. While the vision from Bonavito was interesting, and an overview of the enterprise technology journey to date from Zahiri was illuminating for those who haven’t been in tech for almost three decades, neither were very enlightening with respect to how current and potential customers could do a better job of Procurement right now.

On the other hand, Molly Fletcher’s talk (of the Molly Fletcher Company) really hit home and didn’t overlook the fact that at the end of the day, every strategic engagement will be between people who will put the final touches on a contract that, once signed, will govern a relationship for years to come. Moreover, when you negotiate a good contract, both parties understand up front what the other is looking for — and this usually means that you can literally set and forget the contract until renewal time (but still have confidence and assurance on the off chance something goes wrong).

So what are the mistakes? And how do you overcome them? We’ll get to them. But first, it’s only fair to tell you that we’ll be trying to explain the five mistakes — and corrections — in source-to-pay terms, as opposed to the much more exciting — and real — sports (negotiation) terms that Molly, a sports agent rock star, used. (In other words, her presentation is exciting and engaging … and you really should see it if you get the chance, or, even better, organize it when you get the chance.)

1. Not Knowing Who You Are Negotiating With

Some negotiators think that who you are negotiating with doesn’t matter — it’s all about the negotiation and getting the best deal. And while it can be all about the negotiation and getting the best deal if that’s what both sides want, this is only going to work if both sides are interested in (almost) the (exact) same thing. If both sides only care about the number at the end of the day, it might work. But if one side only cares about the number but the other side cares about the future direction of the organization they are partnering with and how the product, service, or overall relationship is going to improve and grow, then the negotiations aren’t going to go anywhere.

On the other hand, if you know what matters most to the other organization, and what they want at the end of the day, and address that continuously during the negotiation, you have a much better chance at a negotiation that is not only smooth, but truly profitable. If what the other side wants the most is not the most important factor to you, a few concessions on the other party’s wants can lead to more concessions against your wants. If the other side just cares about the price, and you waver a little bit, they might throw in more services or better delivery terms or R&D support.

2. Negotiation is a Transaction

The outcome is a transaction in the form of a contract, but the negotiation itself is not a transaction. The negotiation is a relationship where both parties want to continue the interaction with the goal of coming to an agreement that will see both parties working together for months, to years, to come. If you overlook the relationship, you may never get to the transaction.

3. Getting Offensive

All offensiveness does is cause the other party to become defensive. And defensiveness never results in an open dialogue where the other party is looking for a way to overcome the disconnect between the desired outcomes of both parties and cross whatever perceived impasse has been reached. The solution here is to instead get curious, ask questions about possibilities, or orthogonal opportunities, that will instead get the other party to open up about what they really want or what they might be able to do if they can’t meet your need in a direct fashion.

4. Everything Has to Happen Now

Presuming you are starting a negotiation before you need the product or service, or a contract renewal before the contract ends, you have time — and usually more than you think (even if you have to expedite a shipment). Just because your timeline says you should finish in a week, that doesn’t mean you have to. Sometimes the other party just needs time and a little time can make all the difference — and the more strategic the negotiation, sometimes the more time you need. And even if it means you are without an agreement for a month or two, or buying from the spot market, it’s not always the right thing to rush a strategic negotiation. If the negotiation could result in a 5 year long-term deal that is more valuable than any extra costs you’d pay in the short term as a result of a short delay, especially if the supplier or partner could be strategic and bring innovation and value to your organization you could not get otherwise, can often be more than worth it.

5. Not Asking with Confidence

Always ask with confidence. Do your research. Know your facts. Know what you are asking for is reasonable. And then ask with confidence. Not only will you not get what you don’t ask for, but you won’t get what you do ask for if the other party has any sense at all that you expect you might not get it. Be confident … always. (But don’t be foolish. It doesn’t matter how confident you are, you won’t get a price below the supplier’s cost of goods, for example. But it never hurts to challenge the margin.)