Procurement Trend # 11. Transparent Pricing

Only eight anti-trends remain. Doesn’t sound like much, but when you consider that we have been blasting away at these for two months now, it’s still a lot, especially since it’s going to take us another two and a half weeks to reach the last anti-trend that the futurists gave us. At least most of the “future” trends are recent enough that the older generation can actually remember their inception. (No, not the Leonardo DiCaprio movie!) But I have to agree with LOLCat that it would be nice if there was a way to stop the beat of the futurists‘ drum because, even with these trends that started in some of our life-times, the drum has been beaten to death and I fear, like LOLCat, that the futurists’ may soon return to the age old art of cat-skinning to make a new one!

So why do these hopped-up historians (who’ve obviously had one dozen lagers too many) keep pushing transparent pricing as a future trend? Besides alcohol-induced brain-cell asphyxiation, possibly because they’re still trying to figure out this new-fangled thing called a computer and still struggling to understand just what the world wide web can do for them. Regardless, it’s clear that they’ve just figured out that:

  1. the internet makes global commodity market data instantly accessible

    even in far-away places like China and Russia and Australia

  2. online marketplaces makes average market price data instantly accessible

    including prices that are actually paid by the public or contract prices that will actually be honoured because the contracts are with the public sector

  3. should cost models allow for reasonably accurate price estimation
    which can be calculated in real time using the data from #1 and #2

    so there is no excuse for not knowing when you are being over-quoted 20% by a supplier’s sales rep who thinks you are too dumb to know otherwise

So, what does this mean to you?

Commodity Markets

You should always know the current market price of any base commodity that you are buying and/or that the products you are buying are dependent on (if that commodity generally accounts for 10% or more of the product cost). You should subscribe to commodity market feeds, track them, and set up alerts anytime there is a significant change in prices one way or another over a short time period as this is often a signal to lock in a new contract (before prices climb to high), extend a current contract (if it looks like prices are going to skyrocket and then stay high for a while), or spot buy (if prices are declining and are expected to steadily drop over a period of time) until the time to lock in a new contract is right.

Consumer Marketplaces

You should always know the average price of any consumer good that you are buying in the open market or in the public market as public contracts are public! Don’t just rely on 3-bids and a buy for standard consumer goods, office suppliers, or other off-the-shelf purchases. Get baseline market data and negotiate from there based on leverage, economies of scale, and projected pricing trends.

Should Cost Models

Raw market data combined with local labour market data, local energy market data, and good should cost models will give you a good idea of what you should be paying for any custom manufactured good. Don’t go into a sourcing event without this baseline. If the suppliers have a history of colluding, and you don’t know it, that 5% you knock off of current pricing could still be 15% higher than what the supplier needs to charge to make a profit margin at the high-end of what suppliers in the vertical typically make.

So You Think You’ve Mastered Strategic Sourcing Decision Optimization?

Well, the doctor has news for you. You haven’t. In fact, you’re not even close.

You might be applying at least baseline optimization to the majority of your high-dollar and/or strategic categories. You might be in the Hackett Group Top 8%. You might be building Billion Dollar sourcing models. You might be years ahead of your peers. But the reality is that when it comes to true strategic sourcing decision optimization (SSDO) mastery, you’re not even close.

With the exception of the two e-CHAOS vendors, the doctor interacts and/or works with all of the remaining vendors who offer true strategic sourcing decision optimization (which isn’t a hard thing to do as there are only seven*1 [7] vendors in total with a solution that meets the minimum requirements as set forth in the wikipaper), knows the depth of the projects these vendors have supported, and can say with confidence that the best of the best have barely mastered the basics of optimization 2.0. Barely. And optimization 3.0 is on the way.

[  As a history lesson, optimization 1.0 was circa 2000 when the first solutions that minimally met the four basic requirements of solid mathematical foundations (MILP), true cost modelling, constraint analysis, and what if? capability hit the market. Most of these were basic, supporting only supplier – product – customer DC mappings; unit and transportation costs and then one level of discounts or rebates; capacity, allocation, and min/max supplier selection constraints for very basic risk mitigation; and manually created what-if scenarios. In addition, maximum model size was limited, large models took hours to days to solve, and setting up and importing all of the data from multiple bid sheets across multiple spreadsheets often took days.

Then, circa 2005 to 2007, as a result of a considerable increase in computing power, algorithmic improvements, and domain knowledge, a few solutions started to improve rapidly and we hit the beginnings of optimization 2.0. The platforms evolved to make full use of the theory of logical variables in the MILP solvers; they also supported multiple supplier locations, product substitutions, and differential costs by lane*2; a buyer could define costs by way of a cost model with as few or as many factors as desired, at multiple tiers and with volume or spend-based discounts; a full plethora of allocation, capacity, and risk mitigation constraints that could define required and desired splits, address risk mitigation or mandate awards to a set of products, suppliers, and or regions, etc.; and could automatically generate what-if scenarios based on automatically adding or dropping previously defined or newly defined constraints, historical versus current pricing models, and other factors. In addition, import and export was streamlined from RFX, Auction, spreadsheet templates, and ERP systems (where standard transportation and overhead pricing was kept). State of the art report generators and OLAP capability was integrated so that not only could you generate scenario reports and comparative reports across scenarios, but you could also dive in to see what was driving the savings against the current sourcing strategy and, more importantly, what was driving the costs compared to the unconstrained baseline scenario (and zero-in on what business rules might be too costly).  ]

The reality is that the average best-in-class organization is only doing T-CAP strategic sourcing decision optimization, and is still far from achieving TCO. Basically, when the average organizations build their cost models, they are focussed on the costs of acquisition and production (and distribution) of the goods they are buying. They’re not incorporating downstream maintenance, service and return costs and not considering end-of-life reclamation, recycling, and disposal. Nor are they breaking the acquisition cost models down to determine the upstream impact costs associated with the supplier or production method. For example, if the supplier runs their factory on dirty coal and the company has pledged carbon neutrality and has to buy carbon credits to achieve their goal or the working conditions in the factory are unhealthy (and the factory would be closed down if it was in America) and this adds more fuel to the fire of the CSR activists and is costing your organization brand value, these costs also need to be considered. As a result, the organization is capping its potential return from optimization. Not only is the organization not achieving TCO, but it’s no where close to achieving TVM (total value management), which is what it has to achieve if it wants to realize true optimization 2.0 mastery and move on to optimization 3.0.

And the average organization is not even thinking about the more advanced opportunities that the next generation 3.0 capabilities will enable. Right now, the leading strategic sourcing decision optimization vendors are integrating new capabilities in the new versions of their products that are currently in development, with some basic 3.0 capabilities already released! The convergence of big data, advanced analytics, and decision optimization into a single platform is enabling a host of new capabilities that the average organization has not yet envisioned, including the 6 next-generation advanced sourcing optimization capabilities outlined in Sourcing Innovation’s new white paper on Optimization, What Comes Next (registration required), sponsored by Trade Extensions (which is one of the vendors working hard to give you tomorrow’s optimization solution today).

Companies that master the 6 next-generation advanced sourcing optimization capabilities described in Optimization, What Comes Next (registration required), will not only be the first to master optimization 2.0, but will be the first to enter the world of optimization 3.0 and find savings and cost avoidance opportunities that they never even knew existed.

Are you ready to crank the amp and take it to 11? If so, download Optimization, What Comes Next (registration required) today!

*1 search the SI archives if you don’t know who the seven are

*2 the MindFlow Model, which was recognized as the first SSDO model to support multi-line item optimization back in 2000, actually supported this level of modelling back in 2000, an average of five-plus years before the majority of SSDO solution providers did

80 Years Ago Today

Land transportation reached a new record when the Flying Scotsman became the first steam locomotive to be authenticated as reaching 100 mph. While slow by today’s standards (with the TGV being clocked at 357 mph in 2007), this was phenomenal back in 1934 when many goods were still shipped horse and buggy (with the average walking speed of a horse pulling a cart being 4 mph) and the average speed of a railroad freight shipment (at least before the introduction of the streamliner) was estimated to be about 5 mph (lafn.org).


I’ve got the freight train blues
Oh, lawdy mama got ’em
On the bottom of my ramblin’ shoes
And when the whistle blows, I gotta go
Baby, don’t you know
It looks like I’m never gonna lose
The freight train blues

Integration Point: A Global Content Provider

When we last covered Integration Point (in 2008 and 2010), we discussed their solutions for customs, security, and product classification; for free / secure trade zones and for regulatory compliance.

We talked about how their SaaS solutions helped companies with product classification under HS codes, advance notification (as required by 10+2), denied party screening (through integration with the US denied party lists), free trade / special economic zones (and identification of associated agreements), and the creation of necessary documents as well as the creation of surveys to determine if the supply base was compliant.

It was a good all-around solution, but it wasn’t a one-stop shop. While the import and export management solutions were extensive, the supply chain compliance solutions were limited; free trade was primarily ECCN, entry visibility, and country of origin; there was no automatic HS or country of origin classification; and content was primarily limited to HS/HTS codes, common import documentation, custom compliance documentation, and FTA summaries.

However, recognizing that their entire solution was dependent on good content, Integration Point, which now has twenty (20) offices across six (6) continents (and which promises an Antartica office as soon as the penguins start trading), started working on a Content Repository ten years ago and over the last decade has grown that content repository into a Global Content Repository with relevant trade data for over 185 countries. This include HS Codes, Tariff Schedules, Import/Export documentation requirements, rulings, free trade agreements, free trade and special economic zones, customs compliance programs, denied parties, sanctions and embargoes, and relevant trade acts, such as Lacey. The repository, which is maintained by a team of over 200 people globally, contains millions of base documents and millions of codings and mappings and is updated daily.

Daily updates is a critical part of a trade content repository. While some countries only update their tariff schedules a few times a year, others update their schedules monthly, and some update their schedules weekly (or more as Brazil once updated its schedules 80 times in one year). In addition, as trade relations improve or break down between countries, new trade restrictions / sanctions / embargoes are created almost overnight, denied parties get added to the list daily, and new regulations and rulings also come out on a daily basis. Correct classification, coding, and documentation is the difference between trouble-free trade and having your shipment held up for days, weeks, or months. And not shipping a restricted product to a denied party is the difference between smooth sailing and being federally investigated and fined millions of dollars. In both cases, your logistics and trade managers can only insure properly documented, legal, trade if they are on the ball with up-to-date data.

Since Integration Point has a global team, Integration Point, which sells access to its content repository as well as its trade management solutions on a subscription basis, is able to keep its repository current, which is no mean feat considering there have been over 2M updates to HS classifications alone on a global basis so far this year and over 1M updates to the import / export document database were required to capture regulation updates, trade agreement updates, form updates, and new rulings.

Integration Point now has one of the best and most complete Global Content Solutions out there and should be included in your list of content solution providers as you endeavour to get your compliance under control because Content is a Cornerstone of Compliance.

Plus, based on this content, Integration Point is now able to offer innovative solutions around country of origin determination, product classification, tariff analysis, and supply chain costing. We will cover these in future posts in early 2015.