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!

Maybe It’s Time You Go Direct … Part II

In our last post we noted that most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings — at least initially. After a while, the savings dry up, and unless an organization acquires an advanced optimization-backed sourcing platform, they’ll disappear entirely. (And even with such a platform, the returns will shrink over time.)

The organization will hit a brick wall, unless it goes direct. Why?

Because going direct is the only way an organization can get true insights into the costs, and opportunities, associated with each product it sources. Because, when you get right down to it, there is no indirect sourcing from a product perspective — your indirect is someone else’s direct. And if it’s indirect for your provider, you’re just paying a handling fee to a third party to handle purchase from the source and transportation to a locale closer to you (because you don’t want to deal with import / export, remote suppliers, etc. etc. etc).

And, more importantly, as direct manufacturers know well, up to 80% of product costs are locked in during design finalization and/or product selection. So the only way to take costs out is to understand what costs are going in. But when you go direct, you create detailed should cost models. You tie them to material costs and component costs defined in a bill of materials and roll up the costs with overhead production costs and understand precisely what a product should costs and whether a bid is in line with expectations. This way you know when quotes are higher than they should be (possibly due to collusion), when they are inline with expectations, or when they are lower. If they are inline with expectations but higher than you need them to be, you can understand what the cost drivers are. Then you can ask suppliers to identify designs with alternate materials, or at least less of the high cost materials, and then select those suppliers who will work to bring costs down. If the costs are lower, you can interrogate the suppliers to find out why. Do they have a lower cost source of raw materials? Are labour or energy costs significantly lower than usual? Or is the specification the supplier is quoting toward not up to snuff? The latter is extremely important — it can prevent a purchase of a poor product that could cost the organization dearly.

The power of a direct platform for continual cost insight, and cost saving, is incomparable, especially when compared to an indirect platform. And there’s nothing a direct platform can’t source. It’s the harder sourcing project — indirect is just a bill of material with one entry. And a service project is just a roll-up of service line items.

So why don’t you have a direct platform? Sure, most platforms, including the one you’re using, don’t make the cut, but some of the newer up and coming platforms do, even the S2P platforms. For example, Synertrade has been able to do direct since day one. Ivalua acquired DirectWorks and is integrating direct into its native end-to-end code base. Jaggaer acquired Pool4Tool and has been working on a universal data model (& bridge) to link it to its indirect platform. And even Zycus can suck in a BoM (although it can’t do BoM management) for sourcing purposes.

So go direct. Finance will thank you.

Maybe It’s Time You Go Direct … Part I

Most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings (as most of these organizations spent all their time and effort on direct sourcing). Why? These were typically the least well managed, and the most bloated, categories and simply inviting more suppliers, who had to complete a pre-defined RFX that allowed for apples-to-apples comparisons, pushed prices down, and if the market conditions were right, auctions pushed prices down further and it was not uncommon to find a number of categories where 20%, 30%, or even 40% savings could be found during the first event simply by squeezing the unnecessary fat out of the margins.

But this is the very reason why the first generation sourcing platforms boomed and busted, and why auctions rose and fell in an average organization during the noughts. The organization would save a huge amount the first auction, typically at least 15%. They’d then save a respectable amount during the next auction, say 5%, because all the suppliers came back with their pencils sharpened ahead of time. But the third auction would fail miserably, and most of the time prices would increase. Once all the fat is squeezed out of the margin, competitive RFX or auction will not save any more and, in fact, over time, inflation will creep in, the supply/demand imbalance will shift, and, without something new, costs will rise.

The next step, if the organization is analytical, is generally to bring in analytics, identify the categories with the best opportunities due to market price trends, supply/demand imbalance, or sheer volume leverage the organization had. Careful picking, even if the category was sourced twice, or thrice, before will still lead to some savings. At least once.

And when those savings run out, then you look at optimizing TCO when all costs, discounts, transportation costs, discounts, and associated lifecycle costs are modelled. You build your risk mitigation rules and by splitting the award, choosing the carriers and lanes carefully, and just being smart, more savings materialize. Typically over a few events as your volume leverage increases, your sophistication improves, and your events get bigger.

But there’s always another brick in the wall, and you’re always going to hit it. Unless you go direct. Why? Guess you just have to come back for Part II!

Spend Rappin’ … The Sequel

Now don’t you give me all that JIVE about code I used before you’s alive
Cause this ain’t nineteen ninety five — ain’t even two thousand and five
Now I’m the guy named Lamoureux and Spend is the one thing that I know
So every year, in summer time, I’ll celebrate it with a rhyme!

Gonna save it, gonna shave it, gonna make it good,
Gonna take it all down through your neighbourhood.
Gonna wring it, gonna sling it till it’s understood.
My rap’s about to happen, like the knee you was slappin;
Or the toe you been tappin’ on a hunk of wood.
‘Bout a two fisted dude, with a friendly attitude
and a sack full of savings for the people on the block.

He’s an old grey beard, maybe looks kind of weird,
and if you ever seen him he could give you quite a shock.

Now people let me tell ya about this guy
the dude who’s still slicing spend through July
Now his wit is out, his gloves on the ground,
best you stay to watch him cut it down.
When this dude gets to work on your spend block,
you will be glued to just one spot,
as the master works at a solid pace,
…
get a taste of the waste thrown in your face.
…
this old spend slayer will lay down a heavy layer
of his spend mapping rhythm to a cross-mapped beat
he don’t need no database, just a chunk of spend to trace
and a family of vendors that will roll up neat

I was in a quiet mood, which was good for a brood
as not a sound did abound as he ploughed through the mound

and you will utter a gasp as he slices through the past
lays your mav’rick spend bare faster than a white hare
while you’re up in the attic dealing with the static
that your current spending tool is programmed to give
he’s got an all new app that don’t give a cr@p
about where your data’s from or what form it is in

It’s quick, it’s sharp, and always on the mark
Delivering success on his chinny, chin, chin
it does away with “cubes”, and OLAP attitudes
and treats the spend as a set to be mapped on whim
He’s cool for a fool throwin’ out every rule
every hour of the day when the hot sun shines
Though the beard was-a cleared, I still have never cheered
like I did on that day when he discovered cloud nine

You know I’m right, your spend’s a fright
you need a guide to help you lay it out right
So if you ask him nice, once or twice
he might just show you the hand of sleight
How he syncs disparate data in real time
Whether ERP, Flat File, or API
Without AI or one hundred thousand rules
At a speed that’s so fast, no time to drool

When he gets down to work, this fine old gent
Whips up live reports that are heaven sent
Built on cross-linked filters that stay in sync
As he cross-drills down through multiple data sinks

There are just no words that are fit to describe
How this expert makes your data come alive
The tricks he employs are out of the realm
Of what you will get unless he’s at the helm
You’ve just never seen spend insight like this
When you map your data with his clever twists
Your old Ford engine is now a Mercedes AMG F1
The power at your fingers is second to none

This old spend dude never left the keys
up late till all’s where it should be
But if he were posting here today
he’d say Truthful Spending and to all a good day!

Long time readers know that Sourcing Innovation used to have a Spend Rappin’ holiday tradition until Opera Solutions Acquired BIQ. But even that couldn’t stop the old spend dude, who, after some time off and some contemplative thought, got back to the keys and came up with a whole new approach for do-it-yourself spend analysis that is really so easy your grade schooler could do it (and, sadly, probably do it better than you).

If you haven’t checked it out yet, check out Spendata. As per the doctor‘s deep dive over on Spend Matters (Part 1 and Part 2, registration required), it really is a leap forward in D.I.Y. Spend Analysis. Easy creation and propagation of views using a new concept called filter coins, no more static reports (as every view is a report that can be exported at any time), and no more traditional time-consuming ETL — map, cleanse, enrich on the fly, in real time, in any sequence you like, across any data sets you like, and cross-join and sync ’em all using whatever scheme makes sense to you. Nonsense you say? All we can say is this isn’t grandpa’s spend reporting tool.

It’s Christmas in July. Hence our new Spend Rappin’ tradition begins!