Economic Sustentation 05: Currency Conservation

As we have previously indicated, there is no salvation, at least not now. It’s only going to get hotter, and the best you can do for now is survive. But survival will be easier if you know what to do, or at least know what you might try, so, in this post, and the posts that follow in this series, we will present some of the options at your disposal, starting with currency (conservation).

So how can you protect against the currency fluctuations that can cause you significant economic damnation?

As indicated in our original damnation post, one preventative measure you can take is to determine the Purchasing Power Parity (PPP) of a currency to determine whether it is undervalued, and likely to rise, or overvalued, and likely to fall, and base your total cost of ownership models not on the current value against your base currency but the expected (average) value over the course of the contract.

But of course, this is not enough to predict every fluctuation in currency as some currencies rise and fall as the result of significant investment being pushed into a country (because of low wages, energy costs, etc.), being pulled out (because of new, burdensome, tax laws, etc.), or political actions that cause boycotts of goods from a certain country, or even trade embargoes. The latter situations can cause currencies to rapidly rise or fall seemingly overnight. So what can you do?

First, whenever possible, try to buy in the standard, or preferred, currency of the organization, and, in particular, the currency that most of the customers are paying in. If the organization is being paid in US dollars, then it should, whenever possible, try to buy in US dollars. This even eliminates (potentially costly) exchange fees from the picture.

Second, if this is not possible, because demand exceeds supply and the supplier has more negotiating leverage or the customers are buying in a currency that is not the preferred currency of the organization going forward, try to negotiate discounts as a result of currency strength increases against a major currency or gold. If the supplier suddenly has considerably more buying power from their dollar and their customers have considerably less, then it might be in the best interest of the supplier, especially if it is producing its goods from raw materials bought in a different market using a weaker currency, to pass on a bit of savings to its customers that might otherwise have to default on a contract or risk bankruptcy otherwise. It won’t always be possible, but if your organization is a major customer whose absence would be felt financially by the supplier, it’s worth a try.

Third, if you have to deal with multiple currencies, keep investments in multiple currencies so that trades can be made at strategic times to allow the profits in the currency trades to cover the increased costs of an unexpected rise in the currency required to pay a supplier. While the currency markets aren’t a zero sum game, generally speaking, value lost in one market always appears in another. And while SI realizes that, in the eyes of an economist this is a gross simplification, economics and trade works because, at any one time, there is a fixed amount of GDP in the world and a fixed value of a currency related to that GDP. Thus, at any point in time, value is conserved just like energy is conserved in our universe under thermodynamic laws.

There’s no silver bullet, but there’s enough lead that, if properly sprayed, will get the job done.

Four Hundred and Forty Five Years Ago Today

The Royal Exchange opened in London, and while only the exchange of goods took place until the 17th century, it has a long and rich history as the fifth oldest exchange in the world (preceded only by Antwerp Bourse, Lyons Bourse, Toulouse Bourse, and Hamburg Bourse). It was destroyed by fire twice (the first time in the great fire of 1666 and again in 1838) but still stands, in its third instantiation, today.

It serves as a reminder of just how long established trade has been taking place in the western world and how old Global Supply chains really are.

The Song Remains the Same – So Why Can’t We Sing It?

As the world’s second oldest accepted profession (or is it the third as maybe astronomy came first, as we have examples of astronomy dating back 17,300 years), Purchasing should be well understood by now.

Even the first Purchasing Manual, The Handling of Railroad Supplies — Their Purchase and Disposition, written way back in 1887 by Marshall M. Kirkman and printed by Chas, N. Trivess, has the basic definition of the requirements of a purchaser down flat:

The purchase of goods embodies many varied talents and experiences. The ability to buy advantageously, depends largely upon the knowledge of men possessed by the purchaser and his skill in taking advantage of this knowledge. His value will, moreover, be dependent upon the discretion allowed him, and his judgment in exercising it. The position also requires technical skill. The person filling it must be experienced, otherwise his acts will not command the confidence or respect of his associates. His wisdom and fairness must be such that if he selects material contrary to the requisition made upon him, the person thus over-ruled will tacitly acquiesce therein and abide by the demonstration of its wisdom afterwards. (Pages 38 and 39).

Even though today we might write this paragraph as:

The purchase of goods requires talent and experience. The ability to take advantage of supply market dynamics depends on having the appropriate knowledge and the skill to take advantage of that knowledge. The ability to deliver value depends on having the discretion, and authority, to do so. The position also requires technical skill and the ability to use the tools, old and new, provided to the purchaser. Moreover, the purchaser must be experienced and skillful, otherwise others will not respect her decisions. Her wisdom much be such that if she selects new products or services than the ones the organization, and its employees, are used to, the organization, and employees, will understand that she made the best decision taking all of the information from all of the stakeholders, and suppliers, into account.

A few new words, but the same old wisdom. However, in addition to these few new words, now we have to deal with much more complicated words and a plethora of acronyms like:

  • ABC
  • ATP
  • B2C
  • CLM
  • DPO
  • EOL
  • FIFO
  • GRC
  • HIS
  • HTS
  • ITU
  • etc.

that will drive even the sanest of men mad as a hatter. In an effort to capitalize on a newly recognized opportunity, the consultancies have invented a new language to make the simple complex, and the practical improbable, and the vendors have followed suit. The only thing new since the introduction of the telephone is the platforms that exist to support you, powered by the internet and the latest advances in computing technology. So while most consultancies go on and on and on about EQ, you’ve always needed EQ, just like IQ, and the critical factor is TQ. Today’s purchaser requires much more than the ability to use a phone, keep a ledger, add some numbers, create a shipping schedule, and navigate trade law to succeed. Advanced analytics and optimization. Automated workflows and P2P automation. Complex cost modelling and CAD/CAM skills. Not your traditional everyday purchasing situation that existed before the information age.

So learn the tech, and your job will be a lot easier. And keep reading SI which will, as it has always done, continue to alert you to the technology platforms and skills that you need.

There’s Nothing Wrong with a Paid Pilot – As Long as it’s a Real Pilot

Over on Spend Matters, the analyst team has been posting their thoughts on the market outlook for the next three years (instead of making pointless predictions like their peers, and we all know what the doctor thinks of predictions, which was reiterated in this post), and most of them are logical and expected. However, one in particular needs to be addressed, and repeated. And that’s the fifth of the prophet‘s predictions in his “E-Procurement Market Outlook” on Spend Matters. In particular, the prophet‘s prediction that

Paid Pilots [will] Become More Frequent

There are two types of pilots. The kind where a provider takes data from a past event or project, runs it through their system, and provides you with a report of what they would have done and the results they would have achieved and you compare it to the results you achieved to see if it’s worth considering the system in depth.

Then there is the type of pilot where you try out the system on a live event or real data, replace your current system with the new system temporarily, or deploy the system for a specific project or division to compare operation and results side-by-side with the live system.

Before an organization invests a large amount of money or a large amount of effort to switch to a new system, and after it runs an initial pilot on historical data to determine that a full pilot is worth it, this is a great idea as the organization should be sure that the system will work as intended before it implements the system to support critical functions, but the pilot will only be effective if both parties take it seriously and make their best effort to get the best, and most realistic, results.

Even if the platform is a true SaaS solution that runs on the cloud where the provider can instantiate a new instance simply by clicking a button that creates a new, default, private instance and can make it available by simply creating a user name and password, configuring it for your use will take a lot of effort on the part of both parties. Even if everything in the Admin section and MDM control panel can be 100% user driven, until you have sufficient training and experience with the platform, you’re not going to be able to hook it into your ERP and existing supply chain / Sourcing / Procurement platforms, configure the workflow, create the secure user hierarchy, and complete other configuration tasks. Moreover, you’re not going to know the unique features, the features that can generate the most value, or the best practices. For best results, the supplier has to be actively engaged.

And in the business world, clients come first. If you’re not a client, while the sales and account teams will do their best to make you successful, they have paid clients to support. If those clients need help, they come first. Plus, at any time, they have other organizations they are trying to sell, as any sales person or account manager that doesn’t spread the risk across multiple potential client organizations is not a sales person or account manager that is going to keep their job very long.

However, if you pay for the pilot, the provider’s costs, and risks are covered and the provider can dedicate the resources that you need to get the most that can be obtained from the platform. If every pilot is paid, the provider can hire more resources that can be dedicated to pilot success.

In other words, if success is desired, then the organization should pay for a pilot – as long as it’s a real pilot to support a real project (and not a demo analysis on historical data, that should be free), the provider treats the organization as a real client for the extent of the pilot, and, the provider is not profiting off of the organization. The pilot should be priced to cover cost, nothing more, nothing less.

And, as the prophet points out, done right, the benefits of a paid pilot include tactical ones such as building support for the cost/benefit analysis of different roll-out options (e.g., standardization vs. customization) as well as broader organization involvement in the overall selection of a solution (which will pay dividends in frontline adoption during a full scale deployment). And you can have confidence the solution, and solution provider, will work for you before signing a multi-year deal — all for the cost of a short consulting engagement (which will likely bring more results than a typical consulting analysis will).

Outside-In Issues are Shaping Modern Procurement — Is Your Organization Ready?

Last year, the doctor and the maverick identified twenty issues that were occupying a CPO’s mind in our post on “what is top on a CPO’s mind” on Spend Matters, from overarching issues affecting the organization — such as economic instability, globalization, innovation and corporate reputation — to value creating methods that can increase the overall value of Procurement — like category management, supply base redesign, lean and six sigma and total cost modeling.

The reality is that if Procurement’s value is ultimately derived from the extraction of value from supply markets, then, by definition, the CPO Agenda is driven heavily from an outside-in perspective. This value starts with assurance of supply, and continues with innovation, market penetration, reputation, and regulatory compliance. In other words, the days of focussing on supply assurance, cost reduction, and demand management from a pure supply standpoint alone are long over for any company that wants to survive the 21st century and the many damnations it brings to Procurement (see the 100 Damnations index).

One has to remember that stagnant GDP growth, rising inflation, steady or increasing unemployment, rising inequality between the rich and poor and an increasing need for resources in greatly limited supply are creating a perfect economic storm that will sink any company not ready to compete in the global marketplace that has taken hold in most large economies. Value chains are becoming bifurcated and turned on their heads. Consumers want local and they want global on demand. Products need to come from everywhere and go to everywhere, be compliant with local and foreign regulations, be produced in a socially responsible fashion and be sold through the appropriate digital channels. And this all has to be done by Monday morning at 9 am.

Because, today, a CPO has to deal with half-a-dozen overarching issues that are shaping the course of supply management before she can get to the nine (or so) issues clouding her agenda and the dozens of value drivers at each layer of the hierarchy of supply. Over the next few months, over on the Spend Matters CPO site, the doctor and the maverick will be chronicling these issues, agenda items, and value drivers in three 10+ part series that have been in careful development for a while now, to, finally, give a CPO a complete overview of the mad, mad world they have to survive in.

The first post, on “CSR, Environmental Stewardship, and Sustainability” is up and ready for your reading pleasure. Check it out.