Should You Hedge Your Transportation Costs?

It’s a tough question, and one that you need to answer sooner rather than later. If you read this recent article on how “global shipping lines grapple with plunging rates, overcapacity, and faltering recover”, you realize that the global shipping industry is likely in for a very shaky ride over the next few years given the unpredictable demand, the strong likelihood of consolidation, and the big bets some major shippers are making that could intensify the current overcapacity problem.

The following tidbits of information in particular are worrisome:

  • GDP growth forecasts for Canada in 2012 have recently been revised downwards by various analysts to just above 2%
    Canada, which has done quite well in weathering the global economic storm (through better bank regulation, smarter risk aversion, and a focus on natural resources) is barely going to grow. Imagine how the Eurozone and the USA are going to fare in 2012.
  • China growth, while in the high single digits, is slowing
    When GDP growth in the country that houses one-sixth of the world’s population and that is still on track replace the USA as the dominant economic superpower in under fifteen (15) years is slowing, what hope does the rest of the world have for a quick recovery?
  • The dollar still drives decisions. Green is of secondary importance.
    With little incentive to look at new technologies, there is little incentive to look at sustainable solutions that could be more cost effective in the long run. (Such as more efficient engines, on-board solar and wind power, etc.)
  • Maersk, which ordered 10 Triple E vessels capable of carrying 18,000 TEUs in February 2011, ordered 10 more mega-vessels that will cost US $190 Million in late June.
    All of these vessels are bigger than the 15,000 TEU Emma Maersk, which will remain the largest container ship on the high seas until 2013 when the new ships are deployed. But where is the volume going to come from to fill them?
  • Maersk is betting that Asia-Europe trade will increase by 5% to 8% annually over the next four years.
    China’s GDP growth is around 9% and falling. And not all of that is due to trade. The Eurozone is dealing with one financial crisis after another, and no other country in Asia is going to keep up with China.
  • Box freight rates on the Far East-Europe spot market have plunged below zero after stripping out bunker surcharges. Worse, the rates will continue dropping as the big carriers engage in a “destructive” rate war.
    Price wars always have casualties.
  • Net rates are now lower than during the darkest period of the 2009 container slump.
    Rates have no where to go but up (although they may not start rising until we have a few price war casualties).
  • Alphaliner estimates that idle container ship tonnage will climb above 500,000 TEUs by the end of December.
    To put this in perspective, that’s 19.25 Million m3 of idle cargo space which could hold approximately 33.258 Trillion iPad 2’s in the box, if Foxconn could produce them all. (This is 4.75 iPad 2’s for everyone on the planet.)

Put all this together, and you see that:

  • (Some) carriers are going to go out of business.
    It could be yours!
  • Shipping lanes are going to close.
    Carriers will have to drop low volume lanes and consolidate volumes to keep costs down and stay in business.
  • Rates are going to go up.
    As those carriers that don’t go out of business will have no choice to raise rates if they stay in business, even with lane consolidation and elimination of discretionary and low-volume ports.

If you don’t have a ocean freight backup strategy, it’s time to get one, and if a delay could cause you a significant loss or increase in rates as you scramble to divert cargo to a higher cost carrier, it might be time to hedge your bets. the doctor may not be an expert in ocean freight, but this crystal ball is not very hard to read.

Procurement Game Plan: A Review Part III.3

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. And even more recently, SI began it’s detailed review, in three parts, of this new Procurement Guide. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, supplier relationship management, and success reporting. This post, which is the beginning of the end of our review, dives into techniques for improving Procurement performance and a few specialized areas of Procurement, as covered in the second last chapter of the text.

The authors define four main technologies for improving performance:

  • Procurement Outsourcing
    which is the shifting of some procurement tasks to an external organization
  • Group Purchasing Organizations
    are entities that are responsible for sourcing and managing aggregated contracts on behalf of a discrete group of companies
  • Procurement Cards (P-Cards)
    that allow organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses
  • Procurement Technology
    that includes e-Procurement and e-Sourcing and allows a buyer to take it to the next level

Since Procurement Outsourcing will likely be restricted to tactical functions if your goal is to create a first-rate strategic Procurement Organization, since GPOs primarily offer advantages only on categories where you just don’t have the volume or the manpower, and since proper coverage of the technologies you should be familiar with and using on a daily basis is a book in and of itself, we’re going to restrict our review of performance enhancing technologies to P-Cards.

Procurement Cards are a tool that can be adopted to reduce tactical activities as they negate the need for POs and simplify payment, which can be made by the buyer placing the order. If three-way match is used (which is the matching of a Purchase Order to an Invoice to a Receiving Record), it can reduce administrative costs as it negates the need for a separate invoice review and payment by accounts payable. Of course, on the other side of the coin, a P-Card can also increase the potential for fraud.

However, as the authors note, implementing P-Cards is not as simple as calling up your local merchant account provider. Due to the ease with which a user can pay for goods not received, overpay, or open the company up to fraud (by forgetting their card at their favourite restaurant), a number of decisions need to be made before the first card is issued. As per the text, some of these decisions include:

  • should there be one spending limit for all holders, spending limit by categories, or individualized limits by buyer?
  • are there limits by transaction, day, or month?
  • are any categories restricted? exempt?
  • who is eligible for a P-Card and who is not?
  • is the P-Card limited to purchases from approved suppliers?
  • what transaction information and reporting capabilities do you require?
  • which provider(s) can meet these requirements?

And these decisions need to be made in context of the advantages and disadvantages P-Cards can provide, which include:

Advantages

  • reduced cycle times which free up your staff to do strategic, instead of tactical, work
  • faster supplier payments which can reduce a supplier’s cost of capital if they have to borrow less (and, in turn, the cost they pass on to you)
  • extended payment terms (which do not impact your supplier as you owe the P-Card provider, not the supplier)
  • less maverick buying (if P-Cards are made mandatory for certain purchases and controls that restrict payment amounts and vendors are put in place)
  • better transaction data for your spend analysis
Disadvantages

  • increased chance of theft/fraud (as it’s just another credit card)
  • longer reconciliation time (if one payment is made for multiple invoices)
  • less budget visibility (as they track transactions, not budget)
  • another system to reconcile (if they are not made mandatory for certain classes of payments)
  • move maverick buying if controls are not well defined (as Homer can now order anything he wants from Mighty Office Express Supplies [MOES] if MOES is an approved vendor with no limit)

Implemented effectively, P-Cards can be a great tool. Implemented poorly, they can be your worst nightmare.

After a whirlwind tour of the technologies employed by leading Procurement organizations, which includes e-Procurement, e-Sourcing, and (Decision) Optimization (explained by the doctor in the Inefficiency Eliminator wiki-paper and the two-part Next Level Purchasing Podcast on Supply Chain Optimization [Part I and Part II, with transcript]), the book moves into a discussion of specialized areas of Procurement where special teams are important.

These areas include Global Sourcing, Procurement Outsourcing Provider (POP) and Global Purchasing Organization (GPO) management, services procurement, and inventory management. Since a discussion of each of these topics is a post in itself, and the discussion was quite dense, we’re just going to focus on a key element of success discussed in the penultimate chapter that many books miss — Project Management. As the authors note:

As organizations have grown globally, Procurement is called upon to unify everyone with a common buying strategy. This requires that a leader assemble a team and coordinate the efforts of subordinate Procurement staff, business unit representatives, and management. There are limited resources, goals, and timelines. Does this sound like the project management discipline? You bet it does!

Project management is an essential element of successful Procurement and every Procurement professional needs to be educated in Project Management methodology (which is why NLP has a course on Professional Purchasing Project Management). This section of the chapter discusses the project charter and its importance, project plans for simple projects, project plans for highly complex projects, and risk analysis — a key part of every project plan. This is a section of the text that everyone should read carefully — twice!

At this point, the reader should have a strong understanding of the basic knowledge required for Procurement success, be aware of her weaknesses, and have a plan to address them (such as through additional [online] training, certification, or mentoring). At this point she is ready to begin her career in the Procurement workplace and become a perennial all-star, which is the subject of the final chapter of the book and will be the subject of our final post.

To be concluded!

Some Takeaways from the E2Open sponsored SCM World Collaborative Execution Study

SCM World recently released a study on “Collaborative Execution” (defined as two or more parties working together to improve supply chain performance by continuously solving real problems with better information), focussed on Speed, Innovation and Profitability, overseen by Kevin O’Marah, and sponsored by E2Open that had some rather interesting, and in a few cases, surprising results. First off:

For suppliers, collaboration is primarily a means by which their customers share demand information, with 73% strongly agreeing this is a key aspect of collaboration.

For buyers, an overwhelming 83% believe collaboration revolves around the supplier sharing availability information (e.g. capacity, lead times, etc.).

In other words, both sides agree that collaboration centres on information sharing and, furthermore, the study also found that,
both sides need visibility and want a dedicated problem solver.

This means that the primary barrier to collaboration between most supply chain partners is the fact that companies struggle to share information effectively, with 54% seeing lack of data visibility across trading partners as a perennial problem. Furthermore, the next biggest barrier was speed of issue resolution, with almost 50% agreeing that this was a barrier to effective collaboration. (In addition, 92% agree that quick problem resolution is part of good collaboration.)

But the most surprising result of the survey was that trust, governance, and benefit sharing were not the biggest barriers to collaboration, as commonly suggested, but the ability to connect trading partner information flow, insure quality of information, and synchronize that information for quick problem solving. (For example, almost one half of respondents felt granularity of data was a problem, speaking to the quality issue, and almost one half of respondents saw timeliness of information as a problem.) This says that, for the most part, it is not lack of desire, trust, or willingness to collaborate that is the problem, but a lack of technology to enable collaboration. (And this is a shame, considering that such technology has existed in more than adequate form for at least five years now for even the largest of multi-nationals with the most complex supply networks. It may take some effort to get used to some of the technology, which is only now maturing on the usability front in some cases, but how much of a barrier is it really to spend a few days learning a technology that is going to cut your issue resolution time in half and decrease your risk substantially?)

Given that:

  • collaborative relationships were more cost effective,
    55% of respondents agree
  • good collaboration minimizes risk, and
    75% of respondents agree
  • learning is faster in a collaborative environment
    70% of respondents conclude that the rate of leaning increases by at least one-and-a-half times

Acquiring the technology that your organization needs to take collaboration with your trading partners to the next level should be a no-brainer. (Especially since the last finding means that any operational metric targeted such as inventory days, total landed cost, cash to cash cycle time can be expected to improve one and a half times as quickly as would be the case without collaborative execution. Thus, any appropriate technology acquisition is going to give you a very quick ROI.)

The only other point of interest was the not-so-surprising result that management by exception it seems is still not part of a “truly collaborative” trading partner relationship for a substantial number of companies. This would indicate that collaboration, even among market leaders, is still not very mature. In a mature relationship, each party trusts the other to do what they do best and only gets involved when a deviation is detected or an idea is devised to improve the process or product. But still, it’s nice to know that both buyers and sellers do not see trust as a barrier to collaborating for mutual gain.

Procurement Game Plan: A Review Part III.2

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, and supplier relationship management. This post, which continues our review of Part III, dives into procurement performance — measurement and methodology.

If you do not have a solid way of measuring procurement performance, you do not know how well you are doing or, more importantly, how you can improve. If you don’t measure performance, you can be guaranteed that performance, inside and outside your organization, will not be what you expect, and possibly not even to the minimum levels that you contracted for! You’ll have no way of knowing if your supplier understands your expectations, cares, or if your buyers are keeping up their end of the bargain (and buying on contract).

As a result you should keep a scorecard that addresses, at a minimum, the six classifications of procurement impact identified by the authors:

  1. True Expense Reduction / Cost Savings
    When you obtain a true cost reduction and hold volume requirements steady, this is a huge win that is easily understood by all.
  2. Price Reductions that Offset Volume Increases
    If volume requirements increase 20%, chances are total spend is going to go up, but if you negotiated good price reductions, the organization is still saving on a unit basis and the organization must get credit for this.
  3. Expense Reductions through Negotiation
    If the organization did not buy a product or service under contract in the past, but started buying such product or service under contract, then any cost reduction against average historical unit pricing is a savings. If the organization did not previously buy the product or service, then any cost reduction against a market average is a saving (as that is what the organization would be likely to pay, at a minimum, without Procurement’s involvement).
  4. Volatile Commodity Price Reductions Against Market(-Based) Pricing
    There are some commodities, such as crude oil (where the price is essentially set by Wall Street, as we explained in a recent post here on SI), where it is virtually impossible for an average Procurement Pro to reduce cost. Markets drive the prices, and there’s little a Procurement Pro can do. But if the average year-over-year increase is 25%, and the Procurement Pro manages to keep the year-over-year increase to 20%, that’s a win.
  5. Savings that could be obtained with Procurement Involvement
    If Procurement saved 1 Million on 10 Million of spend, that might not be much to an organization that spends 50 Million, but if Procurement was instead allowed to manage 80% of the organization’s spend instead of 20%, then, instead of reducing top-line costs by 2%, it could reduce top-line costs by 8%, and that is a significant contribution that will carry straight to the bottom line [(c) Robert Rudzki]! And if Procurement identifies any areas where it can exceed the average organizational savings percentage, they should be clearly communicated.
  6. Price Increases Incurred
    If Procurement only reports the good, and hides the bad (which will happen from time to time as that Black Swan, who makes Hannibal look like a juvie in comparison, is one nasty little bugger), then it is risking having its reputation ruined when someone in the finance office, bitter about the recognition Procurement is receiving, digs where you don’t want him too. Report the bad. If Procurement is doing its job well, this number is going to be dwarfed by the other numbers and the total-savings-across-the-board calculation is still going to make Procurement look like a star.

The chapter does a great job of identifying, and explaining, the appropriate cost savings formulae you will need to report the above; explaining what a financial performance analysis is; and explaining some key financial terms (such as EPS, EBITDA, and ROI); but the only other section I wish to point out is the section on measuring total team performance that outlines some common mistakes that should be avoided in your reporting:

  • Cost Savings as the Lone Metric
    The first reaction of a skeptic will be what are you trying to hide? As every organization contains a number of skeptics, don’t do this.
  • Not Using Net Cost Savings as Metric
    It’s not how much you negotiate, but how much you capture. That’s why SRM/SPM and spend monitoring (as described in the 100%-free no-registration-required eBook on Spend Visibility: An Implementation Guide) is so vital!
  • Not Taking Markets into Account When Setting Goals
    If raw material costs for steel went up 30% and your product is 60% steel, then your raw product costs have shot up 18% and a 10% year-over-year cost reduction ain’t gonna happen. Don’t expect it!

Remember, it’s all about cost savings credibility. If you have it, your Supply Management organization will get the respect it deserves!

The Top 10 Supply Management Technologies Webinar 2012-04-24

Top 10 Supply Management Technologies
A Foundation For Your Next Level Supply Management Journey
Webinar

 

Tuesday April 24, 2012 from 12:30 PM to 1:30 PM EDT

 

VFS. Hi-Def Sourcing. Next Level Supply Management. Next Practices. Value Chain Creation. The acronyms and acclamations are flying fast and furious. Even world class Supply Management organizations have to do something more to maintain their year-over-year contributions to the bottom line with the perfect Procurement storm of high demand, low supply, and high market volatility brewing off of the coast. But where does an average Supply Management organization begin?  Good question!

In our upcoming webinar on our Top 10 Supply Management Technologies – A Foundation For Your Next Level Supply Management Journey, Michael Lamoureux will attempt to provide an answer.  The short of the situation is that your organization probably needs to begin a next-level supply management journey, and this will require that your organization achieve excellence along the three dimensions of talent, transition, and technology.
In this webinar, we will attempt to get your organization started on the right track by reviewing the top 10 technologies for Next Level Supply Management which will help an average organization find the goldmine of untapped savings opportunities that it fails to realize because it doesn’t even know about the gold-bearing vein running through its enterprise data.  The reality is that, with the right systems in place, the average company can tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.  And it is these systems, along with a few real world case studies, that will be reviewed in our webinar on Top 10 Supply Management Technologies –  A Foundation For Your Next Level Supply Management Journey!
Registration is limited to 30 attendees.  Please register early to secure your space. 

   
 
Interested in learning more about the technologies that will be discussed? Click here to read Michael Lamoureux’s whitepaper “Top 10 Technologies for Supply Management Savings Today”

Sincerely,
Bridgette Barry
BravoSolution