One Hundred and Twenty years Ago Today

Mr. Charles Dow published the first edition of the Dow Jones Industrial Average, a mere 12 years after Mr. Charles Dow composed his first stock average (of nine railroads and two industrial companies). And while there have been many averages, including a number created by Mr. Charles Dow himself, the Dow Jones Industrial Average (DJIA), the second oldest US market index (after the Dow Jones Transportation Average) is the most famous of these. The only index that come close in fame is the S&P 500.

It’s famous as many investors believe it can be used to describe the market, but all it can really be used for is a baseline to compare the return on specific investments in a historical period to the index. A good investor should beat the index, and a bad investor doesn’t hit it. However, simply judging a price against a price weighted index doesn’t really tell you much about the market, just the historical performance of a small portion of it. It’s a useful measurement of past performance, but not necessarily a good indicator of future performance of the market overall. But all analysis has to start from somewhere, and this did give rise to a new era in stock market analysis, which, for better or worse, did lead to new advancements in analytics and computing, we have to at least recognize it.

Economic Sustentation 09: Oil & Gas Price Shocks

For the last twenty (20) years or so the West Texas Intermediate Crude Oil Price chart has been bouncing up and down like a yo-yo in the hands of a novice who doesn’t know how to work it, but doesn’t stop trying. And any other chart you pull up for international oil and natural gas prices is going to look similar. In other words, as we stated in our damnation post, within a one-year period, prices can double or be cut in half with little or no warning. And either situation will run havoc with your supply chain.

If prices double seemingly overnight, your costs are going up — way up. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, the supplier is not going to put up with it anymore, especially if they are struggling financially. Then the shipments stop.

But it’s not much better when prices drop. While the first to cry foul when prices rise, suppliers are the last to play fair when the prices drop. Arguments that the deal was so good they were losing money on delivery, arguments of higher overhead costs, and arguments of temporary blips are brought to the table whenever you ask for a price concession, even if the contract guarantees you one.

So what can you do?

1. Tie Prices to an Index – Updated Daily, Averaged Weekly or Monthly

Base the contract on index prices, averaged weekly or monthly, and tie the price to that cost on the purchase order date. You’ll pay more if prices rise quickly, but you’ll also pay less when prices fall faster than expected. Then, you can simply acquire good prediction algorithms that have performed well over the long term, and plan for the shocks and not waste time arguing when they happen, leading to much more cordial relationships that can be focussed on service and customer service.

2. Master Predictive Analytics

Don’t just acquire an algorithm, understand it, and run models with slight market changes to see how oil prices shift when other correlated indicators shift. Get better than the competition and over the course of years, you will always, always, always come out ahead.

OR, if this is too mathematically advanced for you, and you are willing to accept sub-optimal outcomes (which will still be better than what you get now)

A. Always Lock Prices in for the Long Term.

So the cost stays the same unless a ceiling or floor, defined as a price percentage, is met. If the average price over a month goes up or down more than, say, 10%, then the price shifts by a fixed percentages, such as half of that. In addition, negotiate for clauses that allow the organization to auto-renew automatically at the current price at an time in the last six months, for the same time-frame.

B. Make sure the ceiling and floor shifts with every price change.

While the cost shift will be absolute, the price should only change every time the price changes by more than a fixed percentage from the price being paid, not the locked-in price.

C. Reduce Oil and Natural Gas Dependence.

Invest in renewable power sources such as solar, hydro, and geothermal so that, over time, you become less dependent on oil and natural gas and the price uncertainty they bring.

Economic Sustentation 06: Preparing for the Corporate Takeover

As per our economic damnation post, sometimes it is not only the case that bigger is not better, but also that bigger takes a bigger bite out of the limited pot that you have to work with.

To point this out, we reviewed two of the big examples of anti-scale that are often mistaken for economies of scale: energy and short-term contingent labour. Since most energy plants still rely on coal, oil, and natural gas, energy costs are ultimately dependent on the unpredictable prices for these natural resources, which depend on factors that very few governments or corporations can even influence. Similarly, if the resource skill-sets that are required are scarce, in high-demand, and there are only a few providers to choose from to begin with, the last thing you want is them consolidating and holding the power to charge as much as any one client can be convinced to pay.

But if economies of anti-scale were the only thing one had to worry about when Mega-Corps entered the picture, all would be manageable, but Mega-Corps take you out of the frying pan and dump you in the lava pit when negotiation time comes and categories that were once in your favour all of a sudden shift very fast to their favour.

So, since Corporations Will Soon Rule the World thanks to the likes of politicians like the Harperman (who made Chicago politicians look good), and bring a whole new level of damnation to your Procurement world, we need to be ready. What can you do?

1. Make sure contracts have a key survivability clause.
The contract must be enforced regardless of a change in ownership structure or assignee. Make sure that your supplier can’t have it’s contracts null and voided the date it is acquired.

2. If a M or A is expected, lock in critical supply with a long term contract.
Mergers and acquisitions increase cost, increase chaos, or increase timelines — none are good for critical, time-sensitive, sourcing projects. Be sure that if an M & A is in the works, that will affect one or more key or strategic suppliers that you depend on, that you close critical sourcing projects (well) in advance of the closing date.

3. Become a customer of choice.
Supplier sales teams fight for their customers of choice. When push comes to shove and there is not enough supply to go around, you will get it. When the parent company wants to push prices up to cover the costs of the acquisition, the sales team will look elsewhere. When you need access to innovation, they will fight to give it. But, despite many contractual claims to the contrary, very few clients are actually customers of choice.

Fortunately, it’s not that hard to be one if you really want to. Start by:

  • Paying on Time
    In an age when many organizations are trying to continually delay payments, paying on time sends a strong message.
  • Solving Problems Constructively
    Everyone has problems, including your suppliers, and everyone screws up – but if you approach seeking a solution, versus a penalty and retribution, they will favour you over others.
  • Improving Their Efficiency
    Help them help you, and do it in a way that helps them help everyone, and they will fight to keep you as you deliver value, versus just revenue.
  • Helping Them Innovate
    We all want innovative suppliers, but have you ever thought about what your suppliers want? The smart ones want innovative customers who will help them innovate, and not worry about whether they own the rights or not. A supplier that sees you as a customer of choice will always give you first access.

Sales Vs. Procurement: Who Wins Control Over Your Next Sourcing Initiative?


Today’s guest post is from Brian Seipel, an information technology and marketing Project Analyst at Source One Management Services.

A while back, I had a chance to discuss why best-in-class suppliers may be, shall we say, less than enthused about the RFP you just released. I’d like to take a moment to move away from such 3-foot concerns of RFP development and address the 30,000 foot concern: Sales’ impression of Procurement’s involvement in the overarching decision-making process. It isn’t a secret that both sides are wary of each other. The name of the game is often winning out over the other side for control of the sourcing initiative.

Procurement’s value to an organization hinges on the ability to get the right solution in place at the right price point as quickly as possible. Sales can help us do this, or throw up barriers that make this goal harder to reach. I propose Procurement pros extend the olive branch and work towards bringing Sales into the equation as partners. There’s too much to gain not to — Sales teams that recognize their place as allies rather than adversaries can deliver better targeted solutions more quickly, and be willing to negotiate more readily.

Good News and Bad News

Most Procurement/Sales relationships can be described as a tenuous, “OK-but-not-great” alliance borne of necessity. The groundwork for forming true partnerships is there, but often not capitalized on. In other words, I have some good news and bad news for you.

Good news! Both sides are in an excellent position to understand end user needs, and know how the market can address them.
Bad news… Sales is often skeptical of Procurement’s willingness to share crucial insider information about needs or plans future development — let alone allow Sales to interface with end users.Good news! When Procurement engages in open dialogue, Sales can be leveraged as a business partner, suggesting otherwise unconsidered solutions that can benefit an organization greatly.
Bad news… However, Sales rarely looks to connect with procurement in the first place, opting instead to look elsewhere in an organization for points of contact, killing such dialogue before it begins.

Good news! Both sides have the ability recognize Total-Cost-of-Ownership and Total-Value as critical long-term.
Bad news… However, as the consequences of the problems manifest, the sourcing process is often derailed — Procurement seeks the lowest cost and Sales fights for the highest revenue. The end result may be a solution not as tailored to the end users’ needs as it should be.

Working Together

Communication is key — when Sales tries to avoid interacting with Procurement or tries to skirt sourcing processes, it is because they aren’t getting the info they need. While there are reasons to remain in control of the process,

  • open up communication, but stay in charge.
    When Procurement brings key stakeholders to the table to interface with Sales, Sales doesn’t feel the need to go behind Procurement’s back or otherwise work to undermine process. Build opportunities for such communication into projects, such as open Q&A sessions wherein sales teams review the goals and scopes of work with end users in a controlled environment. Sales will be less frustrated, and will turn around proposals that are both more targeted and more timely.
  • Process is important; make sure everyone understands why.
    Set out the purpose and goals of the initiative early, and lay out key milestone dates. Let Sales know exactly what the timeline is, what deliverables are due, when negotiations will take place, and when it’s time to put best prices forward or risk exclusion. Make sure everyone is on board internally as well. Be sure to let internal stakeholders know that communication during Q&A sessions is encouraged, but communication in other situations is not — have them direct any communication from sales to you if that communication doesn’t occur in a prearranged time and place.
  • Factor in shades of grey.
    When Procurement insists that every aspect of a proposal can and should be commoditized, focusing only on lowest common denominators to compare suppliers, Sales will fight back. When Sales insists that their solution is too unique and its value too complex to fit into an RFP, Procurement fights back. Both sides are right and wrong, because sourcing isn’t black and white. Procurement does need to factor in intangibles while striving to show why breaking down costs, when appropriate, is necessary to compare competing solutions.

Procurement’s Best Frenemy

Sales goes behind Procurement’s back because Procurement hides key details and stakeholders behind walls and gatekeepers. Procurement throws up bigger, tougher barriers knowing in advance that Sales will try to circumvent them. Being open and honest about the steps above is Procurement’s best bet for putting a cease fire in place.

It can be all too easy to view Sales as an enemy when sales professionals go out of their way to buck the system. But when we step back and consider their motivations for doing so, we see not only simple ways to keep everyone working towards the same goal, but also potential for improving the outcomes of sourcing initiatives by bringing together experts on both sides of the table.

Thanks, Brian.