Market Disruption Forces Supply Chain Change

 

Market Disruption Forces Supply Chain Change

Despite what the title of this recent article on “disruptive market drives supply chain change” over on Just Style might suggest, market disruption does not drive supply chain change, it forces it. However, the article is right when it notes that having an efficient and fast-reacting supply chain should be a must for any brand or retailer.

The difference is slight, but important. Driving implies there is some guidance to the movement. But the nature of disruption, especially in today’s supply chain, does little to guide an organization that needs to respond, and do so quickly. The organization is forced to change, because failure to do often results in a change in liquidity status from profitable to bankruptcy.

And it’s not just demographic shifts that a retailer or brand needs to react to, but disruptions further down the supply chain. Even if a brand can react quickly to a change in consumer preferences and adapt its main product line to have the look, feature, or ruggedness demanded by its target customer base, if a fire takes out its main manufacturing plant, or a labour dispute cuts off production of a needed rare earth metal, or an act of piracy results in its shipment being stolen, what is the brand going to do?

Organizations need supply chains that can react fast, but they also need supply chains that are informed even faster. In order to react, supply chains need multi-tier visibility into critical product lines, such as the visibility that Resilinc can provide. Otherwise, all the market intelligence in the world on changing consumer consumption patterns won’t do them any good if they don’t see that a critical even in their supply chain prevents them from being able to react accordingly.

 

Why Aren’t We Dealing With Extra-Planetary Supply Management on a Daily Basis? Part III

In Part I we asked Why Aren’t We Dealing With Extra-Planetary Supply Management on a Daily Basis? We decided that while it was a fair question, it wasn’t an easy one, for a number of reasons which include, but are not limited to, cost, time requirements (for a mission to Mars), and human safety (as some asteroids hurtle through space at 30 km/s, which is roughly 3 times the expected speed of a rocket-propelled shuttle). In Part II, after examining these issues, we decided that the primary reasons we aren’t yet on Mars and dealing with extra-planetary supply management on a daily basis are lack of funding and lack of focus. We also decided that both the US and China should provide this funding and this focus because it would solve a number of problems both countries are facing. Today, we explain how this focus, and a new space-race to Mars, is what is needed.

In our last post, we identified these problems facing the US and indicated that they could all be addressed, if not solved, by a nation-wide focus on a mission to Mars.

  • High Unemployment
  • Continual Decline in Manufacturing Jobs and Expertise
  • The Housing Crisis
  • Privacy Issues
  • The Drug War
  • Unfunded Liabilities
  • A Collapsing Dollar

Consider the root causes of these issues. The collapsing dollar is primarily due to the stagnating economy and lack of faith therein by the global investment community, unfunded liabilities are due to declining tax revenues, which in turn are due to economic decline and high unemployment, which is due to a lack of jobs, which is partially due to continued job loss to other countries and a lack of talent, which is due to lack of training. The housing crisis is also a result of unemployment and the economy, since it’s a result of people not being able to pay their mortgage and declining property values as a result of a weak economy. The drug war is ongoing partially due to a lack of funding but also due to a lack of technology and programs to detect and prevent drugs from entering the country, and privacy issues are due to a focus on internal vs. external surveillance, which in turn is partially due to an overfunding of military efforts.

So what if you corrected the funding, and focussed on meeting one big challenge, like the US did in the 1960s? You’d need talented people to meet this challenge, so you’d create jobs. Initially you wouldn’t have enough qualified people to fill the jobs, so you’d train them. As a result, employment would be lower and the output per person would be higher, as they’d be trained. In addition, since you’d need to create newer and better technology, and do it quickly in-house, you’d not only bring back manufacturing, but take it to a new level. The housing crisis would vanish. In addition, more employment and more innovation, which would have the side effect of developing new technologies that could be sold around the world, would prop up the economy, increase taxes, and decrease unfunded liabilities. Some of the necessary sensor technology would likely spark advances in technologies that could be applied to border security and drug tracking, without invading privacy, and advances could be made on the war on drugs. The only thing the space race wouldn’t address is the privacy issue, which could be solved simply by turning off the technology that monitors residents and citizens beyond a reasonable point and directing that funding to the new space race.

Moreover, it would also fix many of the problems facing China. As per Mitch Free’s recent article in Forbes on how Nothing Is As It Appears in China, China has some serious problems. The big ones we noted in our last post were:

  • the need to maintain an appearance of success and save face,
  • 1.3 Billion citizens to keep happy and 930 Million to keep employed,
  • population growth that can’t be adequately managed by the one-child policy,
  • factories that need to run and products that need to be consumed, and
  • corruption and the age-old tradition of bribery.

An appearance of success is important in China. That’s why the streets of Shanghai are lined with beautiful buildings, striking architecture, elaborate homes, and professionally marketed businesses even though the layouts are sparse and the offices bare or even unfinished on the inside. In addition, the government, needs to provide the appearance of stability, productivity, prosperity, and optimism in order to keep calm and order over an unprecedented population living on the edge of poverty. One has to remember that in China, the 1% control nearly 70% of the country’s wealth, which is double what the 1% control in the US. And even the one-child policy is not managing the growth the way the government wants. First of all, those that can afford to pay the fine and have a second child. Secondly, those who can’t afford to pay a fine and have a second child, especially in rural areas, will favour male children, even though families in most rural areas will be permitted a second child if their first child is a female. (This is evident by the fact that China will soon have 30 Million more men than women of marrying age.)

In addition, in order to keep its citizens working, if it has no other option, China will not only keep factories producing goods that the market doesn’t need or want, but will keep building entire cities in preparation for an urbanization that just doesn’t happen. For example, one Chinese State Owned Enterprise (SOE) produced 60,000 machines in the last year that are manually operated for a global market that only buys automated machines. Even though the market is no longer there, the machines were produced just to keep workers employed. In addition, in an effort to get rural citizens into affordable urban housing, China has been building as many as 10 new cities a year, some the size of New York and London, to accomodate hundreds of thousands or millions of residents, that never arrive. These beautifully planned, fully finished “ghost cities” designed to accomodate large populations only have a few thousand residents, who are primarily infrastructure employees and construction workers. (Forensic analyst Gillem Tulloch estimates there may be as many as 64 million empty apartments in Chinese ghost towns.)

Now imagine what would happen if China declared that its mission was to be the first country to land on Mars? It would likely start by taking all of that money being used to build “ghost cities” and directing it at R&D establishments. It would move the brighter workers out of the factories and into R&D labs and re-tool the factories producing useless machines to produce proto-types and components for rockets, shuttles, and other space vehicles. It would be able to keep just as many people employed, but it would be working towards a meaningful, useful goal. In addition, it would increase its rate of innovation, improve its GDP, and not only cement itself as the world’s second largest economy, but accelerate towards the point where it could potentially overtake the US, which would make it enormously successful in the eyes of its citizens and allow it to not only save, but gain, face in Asia (where face is important). And if it happened to figure out how to successfully create workable, maintainable artificial gravity in a manner that was hydroponic friendly, it could be the first to colonize Mars, which could help to solve its population problem (especially if it can also figure out how to mine water from asteroids).

The only problem that isn’t directly addressed is corruption, but if the population is focussed on progress, and not capital gain, corruption is less of a problem.

So bring on the space-race to Mars. The world will benefit! (A rising tide lifts all boats. And what tide is bigger than the tide that controls 1/3 of the world’s economy?)

Early Payment Discounts vs. Early Payment Rebates

Are we dealing with six of one and half a dozen of the other? After reading “The Art of the Play” (PCubed.com), I have to wonder.

They are different in that you get one right away and you get the other later, and they are different in that one is just a reduction in spend and the other can be treated as an income stream, if the CFO so desires, but in the end they both have the same effect on the bottom line — less spend.

So why would an organization favour one over the other when the big difference is capturing the savings now versus capturing the savings later? If the organization was limited in cash and was trying to maximize savings, then capturing the savings right away would definitely make more sense, but if the organization was flush with cash and the supplier offered tiered rebates that improved with volume, then the organization might want to wait until later. Otherwise, the doctor can’t see much of a difference.

However, one area where there is a big difference is paying for a platform vs. paying for a service, especially for a big company. For example, the Oxygen Finance model described in the article is to provide you with a service where you pay up to 50% of the discount or rebate captured by transaction. While this is a good deal for a mid-sized company that might not have the up-front cash required to implement the end-to-end e-Procurement solution required to effectively take advantage of discounts and rebates offered by suppliers for quick payments, this can be a very expensive solution for a large enterprise. Consider a company that spends 250 Million a year, the low-end of the market for Oxygen Finance. If the average rebate is 1.5%, and you give one third of that up to the service provider, then the organization is paying 1.25 M a year for the solution, and only achieving a 2X ROI.

A company of this size can acquire a SCF solution for a fraction of this cost and realize a much larger ROI.

When you dive in, you realize that there are only three reasons most companies can’t create or take advantage of most of the early payment discount and rebate opportunities available to them:

  1. Invoices aren’t getting in the system fast enough
    because most of them are coming in as (e-)paper.
  2. Approved invoices aren’t getting to AP fast enough
    because routings for approval take too long.
  3. Procurement doesn’t have the manpower to negotiate rebates on 100% of spend
    because there are too many suppliers.

And while these were valid problems a few years ago, without (m)any real solutions (that an average organization could afford), today:

  1. An organization can acquire a SaaS end-to-end invoice automation framework, such as the one offered by Nipendo, that will convert all incoming invoices into one standard e-format for six figures.
  2. An organization can acquire a number of rules-based e-Procurement and invoice automation solutions (including Nipendo‘s) that will automatically approve and route all error-free invoices that match a PO or contract to the AP system and route those that require manual correction or approval to the right individual for online (e-mail) approval.
  3. An organization can see significant returns addressing only 80% of the spend which is typically with less than 20% of the supply base.

An organization that takes this approach can typically acquire a solution for (much) less than 500K a year, save 1.5% on 200 M of spend, and see a (minimum) 6X return, which is the return you should be looking for from an e-Procurement solution.

Maybe there’s another reason for a large enterprise to go transaction-fee SaaS for discount and rebate management, but if there is, the doctor ain’t seeing it — and he’s been covering SCF for years. As far as he is concerned, the sweet-spot for transaction-fee SaaS for discount and rebate management is the 50M to 250M range, because the implementation cost of the necessary end-to-end e-Procurement, invoice-Automation, and SCF solution isn’t that much cheaper for a mid-sized organization than for a Global 3000, and at less than 200M of addressable spend, the ROI multiplier starts to drop considerably.

Any differing opinions?

The Evolution of Procurement, and Where It Is Headed

Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC and co-author of “Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing”.

While strategic sourcing and procurement groups around the globe continue to make headway into new departments and address categories previously off the table, their popularity with business owners and stakeholders has never been lower. Headlines and titles like “Everybody Hates Procurement: Here’s How To Fix It” and “The End of Procurement, Forever!” and “The Problem with Procurement: Misalignment” seem to pop up every day.

I attribute these headlines to the growing pains strategic sourcing and procurement will naturally experience as the role of this group continues to expand and evolve. And evolve it has! In the 11 or so years I have been at Source One, I have seen Strategic Sourcing transition from rarity, to necessity, to commonplace, to part of a larger spend management strategy. In its current form, and as it heads into the future, it looks to me that modern procurement has developed to be just as much about negotiating with an organization’s leadership as it is negotiating with a supplier base. In fact, I tell most college grads entering this industry to be prepared to challenge those within their organization, learn how to market their group, and sharpen their debate skills. Getting savings is the easy part, getting your organization to act in their own self-interest is the challenge. This is not a job for the weak-willed or thin-skinned! To explain what I mean, here is a quick rundown of the change I have witnessed.

The Reactive Buying Era

When I first started at Source One, most of the purchasing groups in the companies we worked with dealt exclusively with raw materials. If the personnel had “sourcing” in their title, it was rare, and many of our customers did not have any sort of sourcing initiative for their indirect spend items. Stakeholders and the department heads responsible for budgeting conducted the purchasing for their needs.

In those days, we did a lot of explaining to potential customers just on what Strategic Sourcing was. It wasn’t a commonplace concept even within Procurement, so those outside of it — Finance and IT, for example — had very little knowledge of it. Especially in the mid-market, any group with spend management tactics that were more advanced than three bid purchasing or preferred supplier relationships were the exception, not the rule.

The Sourcing Era

Slowly, Strategic Sourcing became more and more familiar until it ultimately blossomed. Strategic Sourcing practices were first used by a limited number of organizations as they purchased their raw materials. Seeing the successes in that category, organizations then asked these “sourcing” teams to look into areas like packaging and shipping. Strategic Sourcing’s applicability continued to grow as success after success was reported. Subsequently, most departments were soon asked to start implementing strategic sourcing practices, and procurement departments began to be more directly involved in buying decisions.

The Category Management Error

In its latest form, Strategic Sourcing is now tied into category management, meaning companies are hiring or developing sourcing experts for their individual spend categories — telecom, media buys, office equipment — or departments — Capital Projects, Marketing, IT — and restructuring their departments with the goal of achieving near 100% spend under management. With dedicated sourcing experts managing each category and an intense focus on supplier relationships, those sourcing departments effective in category management are not only able to take advantage of market conditions today, but are better able to predict future market conditions and opportunities within the managed categories.

Even utilizing these strategies, a common problem remains. These sourcing teams lack the institutional clout within their organization to be effective in managing spend. SOPs are reluctantly followed, if they are followed at all, by the end users, and the majority of the end users and stakeholders do their best to avoid involving the sourcing team. Additionally, sourcing initiatives are often dead on arrival, killed in the name of deadlines or supplier relationships

The Change Management Era

So, that’s a short history of Strategic Sourcing’s development. So where is the industry going from here?

From what I have seen in the work we perform for the clients of Source One, category managers must now become “change managers”. “Change managers” are those leaders who can navigate their organization’s structures and barriers to be effective, and transition their department’s role from that of a reactive-tactical resource to one that is proactive and strategic.

“Navigate” here means “maneuvering around” objections or otherwise getting things done, and there are a few ways that I have seen different sourcing groups approach this. At the last conference I attended, I heard some sourcing teams discussing their use of a “bell cow” — a single resource within their group that is skilled in working with department heads and generating acceptance from end users for their group’s sourcing activities. In other cases, I have witnessed sourcing departments working through an executive sponsor, often times a CFO, to help push their group’s agenda items. A third, slower method I’ve seen used to promote sourcing initiatives is the granular approach, meaning the sourcing group is using any quick-and-easy method available to build credibility and support, end user by end user and department by department. Not surprisingly, this third method is high resource-low return, and often causes some areas ripe for sourcing to go untouched. Of these, the proper solution is the one that works best within a particular organization.

When sourcing groups improve their internal relationships, the stakeholders are better encouraged to participate and end users are better encouraged to comply with sourcing activities, increasing their chances of success. These project successes give Procurement something tangible to market internally and use as leverage in drumming up support for future initiatives, and also exposes their unique skills to the organization as a whole. Through continued project success and internal relationship-strengthening, Procurement will slowly be seen as an integral and centric resource to the company; its unique skillset prized not only for its ability to identify cost savings for the organization but for its ability to generate value for the organization as a whole.

Summary

As the need for more strategic spend management practices increases, procurement departments are evolving to meet these newfound challenges. But rest assured; the industry’s progress is not slowing or stopping. Adapting to the industry’s modern changes and challenges is only setting the stage for the next evolutionary step, which will be to become a revenue center for the organization. The better equipped a procurement team is now at handling the challenges of the current market, the better prepared it will be to predict and stay ahead of future trends

Thanks, Joe.

Intengo – Mastering the e-Procurement Tango in Turkey

When we last covered Intengo back in 2010, they were doing the e-Sourcing Tango in Turkey. At that time, they provided an on-demand e-Negotiation platform built around (multi-round) e-RFX and e-Auction with a sprinkling of Supplier Information Management (SIM) and early stage catalog management thrown in. A project-oriented system, it was a breeze to set up a new RFX or e-Auction event in the system and get a new sourcing event going. One of the unique features of the platform was the calendar view, which integrated with Microsoft Outlook and hot-linked to all of the relevant screens in the relevant projects, and which allowed a buyer to get a quick summary of where they were and what they needed to do at any given time. Other cool features were item-level currency support, smart unit support, and bulk-updates on (filtered) lots or items.

Since then they have been dancing up a storm and they are now the leading e-Sourcing and e-Procurement provider in Turkey, with over 100 clients, including a few notable international clients with operations throughout Europe and Asia. That’s right, they have migrated from a basic e-Sourcing application to an end-to-end e-Procurement solution in an effort to serve their clients better. Since 2010, they have added requisition and purchase order support, price lists and full catalog support, delivery notification and tracking, and integration with the big ERPs (Oracle and SAP) for master data management, invoice management, and e-Payment / Accounts Payable integration. In addition, they have also integrated budget management into the e-Procurement process.

A user can begin a requisition from a catalog or from a free-form request. The request can be sent straight to a (preferred) supplier if it is within the user’s spending limit (as defined by the budget), turned into a Purchase Order (after being approved, if necessary), or turned into an RFX or e-Auction. If the request is turned into an RFX or e-Auction sourcing event, the RFX or Auction is pre-populated with pricing from the most recent supplier price list (at the volume level) or catalog if pricing is available. If the request is sent straight to the supplier, the supplier can accept the request and provide delivery information, reject the request, or decline due to incorrect or insufficient information. In the last case, the buyer is notified and corrections can be made. In the case of an RFX, after the event has been configured, the request is sent to the selected suppliers who can bid on the whole or part, decline to bid on the whole or part, or decline to bid because of incorrect or incomplete specifications on one or more line items. In the last case, the buyer is notified, and if the buyer agrees, he can suspend the RFX or e-Auction until corrections are made, and all suppliers are immediately notified of the event suspension. A supplier who accepts a purchase order, who is awarded an RFX, or who wins an auction is able to immediately enter delivery information into the system (which can generate e-invoice data for submission to the organization’s ERP) and when the product is received, a buyer can mark the product as received in the mini delivery module.

The catalog functionality is pretty much what you would expect and is comparable to most other e-Procurement platforms out there and the budget capability can be used to define budgets by user, project, and department and track them against requisitions and awards project-to-date and year-to-date. The built-in reporting is good, and Intengo even has canned reports by brands (which are great for retailers). Furthermore, Intengo can create and customize any report on any platform data that you want, but note that the platform is still missing a custom report builder. However, realizing this weakness, Intengo gives you the ability to export any and all data to Excel or to your ERP (so you can build your own reports using reporting tools you already have). So if you do full ERP integration (and use it for your Master Data), and you already have a best-of-breed reporting product sitting on top of that (and chances are you do), you can use that to build custom reports on your sourcing and procurement projects.

They have also made enhancements to their e-Sourcing platform. One of the most significant enhancements is their formulaic auction capability. This weighted auction capability allows a user to define an arbitrary weighting, composed of one or more factors, to every bid, on a lot and line-item level, that is used in determining the rankings. The user can define one-or-more weighting factors based upon quality, warranty, shipping, associated duties, etc. The categories can be (optionally) displayed to the suppliers who can choose the ones relevant to their bids (such as shipping, warranty included, etc.) and the weighting factors can then be applied behind the scene. In addition, during an auction, suppliers can also suggest substitutions for each line-item and lot, which a buyer can accept. (And, if necessary, the buyer can pause the auction, define appropriate formulae, and provide additional information to other suppliers who might also be capable of offering substitutions on different terms.)

Intengo is definitely an up-and-coming contender on the end-to-end Procurement scene in the European mid-market and another European e-Procurement provider to watch, especially since, like other European players, they have been internationalized and multi-language since day one on their integrated, single-solution, SaaS platform that allows them to create new instances virtually on-demand. While SI doesn’t expect them to cross the Atlantic for another couple of years, it does expect that the North America companies competing across the pond are going to be seeing a lot more of them on mainland Europe in the coming years.