Should You Be Using CEI?

Chances are, like every other organization on the block, your Finance department is tracking DSO and if the DSO metric is close to the corporate goal of, say, 30 days, declaring everything to be wonderful and right with the customer base. But is this really the case?

As a recent article over on CFO.com that points out “the trouble with DSO”, an acceptable DSO might not be acceptable at all. First of all, DSO can be manipulated. Secondly, increases in DSO can indicate a situation where a company is “forcing” sales by accepting poor receivable terms, or selling its product at a discount to create sales. (Not good at all!) Thirdly, not only will most customers not pay a net 30 day invoice early, some customers will pay on day 30 like clockwork and should probably be excluded from the DSO calculation.

According to the authors of the aforementioned article, what is really important is collections relative to accounts that have come due, not the current receivables unlikely to be paid early. In order to capture this, the authors are recommending a different metric, the Collection Effectiveness Index (CEI). In this index, 100 is a perfect score, but 100 can be exceeded if a company asks for, and gets, cash in advance. The calculation of CEI is as follows:

 

Beginning Receivables + (Credit Sales/days) – Ending Total Receivables

Beginning Receivables + (Credit Sales/days) – Ending Current Receivables

 x 100

 

It’s an interesting calculation, and I see one advantage for Procurement. During the calculation, the analyst will have to identify those customers with amounts due in “current”. If a customer shows up in this bucket month after month, they probably aren’t a good customer to have. And if a customer never shows up in this bucket, they are probably a good customer to have. This will help Procurement prioritize customer requests as the requests from good customers should get priority, as that is what can keep an organization afloat in trouble times.

Any different thoughts?

Global Collaboration Tips

A recent post on how to “be a better global collaborator” over on the HBR Blogs had some really great tips for those Supply Management professionals working with their global counterparts. My favourite tips were:

  • Be Prepared to Be Uncomfortable
    At least one of your global counterparts will speak or act in a way that makes you uncomfortable on a regular basis, and won’t even notice it because it’s normal behaviour for him. For example, he might get way too close in a conversation or always try to dominate the conversation.
  • Be Aware of the effect of Your Actions
    Similarly, there will be at least one global counterpart who will be uncomfortable with the way you speak or act from day one, and you will need to observe which communications or actions make that person uncomfortable and try to deliver them in ways that are less imposing to that person to foster a working relationship.
  • Prototypes are Not Perfect
    Your training classes will train you on the attitudes and behaviour of the average person. There is no average person. Maybe you were told that your Chinese counterparts would be relatively “shy”. And while most Chinese counterparts who are in subordinate positions might act “shy”, there are Chinese people who are very outgoing and aggressive. Be prepared to adapt to the personality and not the person.
  • Be curious
    Show an interest in them and their culture. Just remember what topics are sensitive and stick to the safe topics at first.

I’d recommend checking out the post on “how to be a better collaborator”. I know it’s worth your time.

Save Yourself an Hour — There’s Only ONE Real Driver Behind Inventory Costs

There’s only one real driver behind inventory costs.

Inventory. No inventory, no inventory costs.

Now you can skip the first ten minutes of the over-promoted webinar coming up three weeks from two days ago. (Deliberately confusing.)

As for proven, practical techniques for controlling inventory, there’s only two of those you really need to know.

  1. Don’t buy what you don’t need and
    You’d be amazed at the cost avoidance you’ll realize.
  2. Don’t buy more than a moderate buffer beyond what you expect to need by the next replenishment cycle. (Altering the quantity every order if need be.)
    Then inventory doesn’t build up beyond an expected level and storage costs don’t escalate out of control.

Ten more minutes saved. As for smart use of technology to manage inventory data — upstream and downstream — and to improve forecasting, there are three key points:

  1. get sales updates at least as frequently as orders are made,
    forecasts will always be more accurate with recent data
  2. be sure to factor in upcoming marketing or (predictable) market events expected to make an impact,
    so you won’t be surprised by a rapid spike or drop in demand and
  3. put the tool in the hands of an expert.
    Forecasting is art and science. You need an artist who knows how to select the right model and use the tool properly or you’ll be repeating the i2/Nike fiasco all over again. (Don’t get the reference, Google It.)

Okay, twenty more minutes saved. Now on to procurement and transportation tactics to reduce inventory build up. This is where it could get interesting, but it could also get quite obvious. If you review the six key points from above, you will reduce inventory build up if you:

  1. don’t order product you don’t use
    no inventory, no build up — the best way to cut inventory costs is to control demand
  2. don’t order more product than you expect to sell or use within the next two replenishment cycles
    as more than a moderate amount of buffer can add exorbitant cost
  3. re-run the forecasts before each replenishment cycle
    as downward projections must result in an inventory reduction and
  4. don’t forget the expert
    as this is one application where the tool alone isn’t enough

You can certainly get much more advanced than this, but is it worth it? The most successful organizations follow the 80/20 rule. They apply 20% of the effort to get 80% of the savings and then move on to the next low-hanging fruit big savings opportunity. Inventory management is as old as the Procurement profession, and best practice inventory management and forecasting hasn’t improved that much over the last decade. Returns are diminishing and at some point you have to wonder if it’s worth it when there are so many other opportunities on the table for cost reduction and avoidance. You can disagree, but the most successful Supply Management organizations use cost reduction waves (and implement multiple cost reduction strategies) and only go after the last 20% if the effort is really worth it. With raw material and fuel costs rising rapidly, unless you’re using a third party storage facility that is significantly over-billing (and this is almost as common as office supply vendors replacing cheap contract SKUs with expensive off-contract SKUs when the products reach end of life) or maintaining a buffer that is much too high, inventory costs are no longer a significant portion of lifecycle costs for many products.

That’s the doctor‘s view. Leave a clearly defined different one if you wish.

Boilerplate Blasphemy

A recent article over on the eSide that explained why you need to “Focus on the Fine Print”, while a little simplistic, did a great job of pointing out the most important thing you need to remember when you are in contract negotiations:

The advantage always goes to the drafting party.

Always. Why? Because the drafting party always takes home-court advantage. While it is theoretically possible to prepare a contract to the advantage of the other party, I’ve never seen it happen. Even the fairest contract I’ve ever seen gave home-court advantage to the drafting party in the section on Governing Law.

Thus, if you are given a choice as to whether you should start with your paper or their paper, start with yours. And then remember that:

The fairer the contract is, the faster the negotiations will go.

You should only take the advantage where you absolutely need it. If you try to take it in every clause, the other party will likely be insulted at your lack of willingness to at least offer a few concessions and negotiations will not go well.

Remember that the point of a good contract is to build a framework for a problem-free working relationship. Keep that in mind, and drafting will go easier.

The Control Provided by e-Sourcing is Only an Illusion – YOU HAVE NO CONTROL!

A recent post on one of the lesser known sourcing blogs indicated that, due to the lack of economic upturn in most of the developed world, maybe now is the time to finally try reverse auctions. The rationale, quotes from a CEO and his team that watched their first reverse auction that indicated that it was simple, powerful, easy to follow, effective, and, most importantly, if you read between the lines, gave them an illusion of control over the process and the results.

This, and some of the messaging coming from a few of the smaller e-Sourcing providers, is scaring me. I fear that adopters may believe that adopting this technology may give them some control. Well, as this recent article over on Chief Executive on why you should “embrace tomorrow’s strategies” clearly points out, you have NO control! You can manage the process, but you have no control over the outcomes. Why? For starters

  • Cartels, cabals, speculators, organized crime, and entire countries are constantly manipulating commodity prices.
    Case in point: China possesses over 90% of many of the rare earth metals used in many technologies (smart phones, batteries, etc.) and when they recently reduced exports, a steep price increase resulted that triggered a costly disruption of delivery of the precious commodities to global business.
  • Disasters are on the rise.
    Industrial, agricultural, and political disasters are increasing in frequency and wiping out production in entire regions. For example, the nuclear meltdown in Japan affected most businesses that rely on a Japanese supplier.
  • Global currency fluctuations, unforeseen credit crises, and economic stagnation are increasingly severe and unpredictably enduring.
    The extreme fluidity in the valuation of imported and exported goods, services, and components is as equally difficult to predict and manage.

No e-RFX or Auction is going to help you regain control over these economic nightmares that you have to deal with on a daily basis. And any provider that’s trying to sell you 1999 e-Sourcing technology to deal with the current economic stagnation doesn’t have a clue. There’s only one way you can even hope to adapt to the constantly changing reality, and that is through the adoption of a supply management platform with advanced data analytics capability. You have to constantly monitor, react, adapt, predict, plan for what-if, monitor, react, and adapt again. This requires extensive data acquisition, mapping, transformation, and analysis that only a real analytics solution, with advanced (spend) analysis, optimization, simulation, and reporting is going to provide. Don’t get fooled. All auction platforms give you in this day in age is a false sense of security. Sometimes an auction is the right way to go, but, most of the time, an auction (on its own), is not the answer.