Reverse Auctions Are Not Strategic. It Isn’t Always Strategic! Part III

This isn’t to say that they aren’t important, that they’re not one of the best methods at your disposal to quickly identify current market prices, to obtain products or services at market prices in a competitive market, and to increase transparency in your strategic sourcing efforts but, on their own, reverse auctions are not strategic.

A reverse auction is simply an electronic way of enabling a simple bidding opportunity that could just as easily be conducted in the real world (if your supplier representatives were willing to travel to the auction location to place their bids). Do you think strategic when you think of this type of public auction? No. And simply electrifying something does not make it strategic.

An online reverse auction (has the potential to) open up the auction to more potential suppliers, drive greater market transparency (if more suppliers choose to participate), and streamline your product or service acquisition, but nothing about this is strategic. It’s simply good tactics.

This isn’t to say that a reverse auction can’t be the end result of a true strategic sourcing effort. For example, if you are sourcing custom manufacturing services for a new, relatively unique, product that you are preparing to unleash on the marketplace and you have went through a supplier pre-qualification round to select a small group of suppliers you would be willing to jointly develop with (who have all received the confidential specs under NDA), you could decide to simply hold a reverse auction to streamline what could otherwise be a time-consuming multi-round RFX, but note that this is just the tactical implementation of a sourcing strategy for a strategic category. The reverse auction itself is not strategic!

And it’s definitely not strategic if you’re sourcing $1,800 worth of office supplies or store shelf inventory!

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Has The Time for One Vision Arrived?

One man, one goal, one mission

One heart, one soul, just one solution

One Vision, Queen

Back in the early 1980s, somewhere on the Redwood Shores of California overlooking the San Francisco Peninsula, there stood a man who had a vision that was decades before its time. The man was Larry Ellison and his vision was that ONE system would power the entire global enterprise. Under his leadership, Oracle worked frantically to develop an end-to-end platform that would make his dream a reality, and in the mid 1990’s, Oracle had enough base functionality that each and every aspect of an entire global enterprise could be run off of one instance of Oracle. A significant number of Fortune 500 enterprises then started down the path of implementing Oracle across their enterprise, but due to the effort and costs involved, most of them abandoned the effort before reaching completion. As a result, even though 98% of the Global Fortune 500 use Oracle today to power significant parts of their business, you can count the number of business that run their entire operation off of one Global instance of Oracle (including Oracle itself) on your digits.

And it’s unfortunate. Even though Oracle, like any ERP or platform provider, will never compete against best-of-breed in any specific area of functionality, a pinpoint focus on best-of-breed ( BoB ) solutions can create more weaknesses in your platform then they claim to fill. Because without a solid, unifying platform:

  • There is no common framework for application integration.
  • There is no centralized data store.
  • There is no single version of the truth.

It has taken a while, but thanks to the intensive efforts of the niche sourcing advisory practices and the spend analysis software and services providers, people are starting to realize that you can’t truly do proper sourcing, which must be based on a solid understanding of TCO, if you can’t even see all of your associated costs. And while most good data analysis tools will allow you to ETL/merge multiple sources into one cube, if you have conflicting data, which is right? (And to even get this far, you might have to define custom translations for each data source as each could be using a different coding and indexing scheme, as there is no common framework that connects the applications.)

Furthermore, how can you make fact-based decisions on the fly, which you often have to do in the real world, if your current spend report (or, more likely, dangerous dashboard) only contains partial information? And when you’re looking at a spend report, how do you make sense of $10 Million on Contingent Labour if you can’t dive into that data because it’s in a separate, BoB, solution maintained by your Managed Services Provider (MSP)?

We’re quickly reaching the point in time where there’s no way you can maintain a competitive supply chain operation if you can’t get to the right version of the truth in real-time when you need to make a decision. And the only way you’re going to do that is if all of your core procurement data — direct, indirect, services, contingent labour / Statement of Work, and T&E — is in one place. Even Coupa, a Procurement solution directed at the mid-market, realizes this. Not only have they built a solid Procurement platform that can capture all1 of your spend data, but they have worked heavily on exposing their APIs so that if you already have an ERP or central data store (or warehouse), you can easily integrate Coupa with the ERP (or central data store) and maintain one, consistent, version of the truth.

I’m not saying you shouldn’t use BoB, in fact, as I will argue in a future post where I ask if now is the time of niche, you should use BoB wherever and whenever it brings value, but only if you can integrate the BoB solution and, more importantly, the data it captures, into a central solution so you always have access to the full picture. Because, even if it costs more up front, the value it will enable year after year will be immeasurable.

1 I will submit that there are some types of spend data that their platform is much more suited for and that their platform does not handle all types of spend with equal adeptness, but that’s not the point.

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Spend Analysis Is Not Strategic. It Isn’t Always Strategic! Part II

That’s right, in and of itself spend analysis is Not strategic. This isn’t to say that spend analysis isn’t one of the most important actions that your supply chain can take in its effort to reduce costs, improve efficiency, and make the most effective use of business resources, but that the art of simply doing a spend analysis is not strategic.

Spend analysis provides a picture of the products and services the organization is spending money on, whom the products and services are being bought from, the organizational buyers who are spending the money, where the products and services are being bought from, and where the products and services are being shipped to and/or utilized. But this process is not strategic — it’s tactical. Furthermore, this information alone is not strategic. Let’s say the organization is spending 2M on computing equipment. So what? On it’s own, this information is not strategic. And unless the spend is significant (at least 1% of organizational spend) and the number one goal is to reduce total organizational spend by 5%, or the equipment needs to be unique (the organization’s proprietary trading platform only runs on hardware that natively supports AIX Unix), it’s not going to be used strategically. If the analyst compares spend to market prices and determines that reasonable savings are available (5% to 15%), the decision might be to run a sourcing event, but if it’s just another cookie-cutter RFX/Reverse Auction and/or TCO optimization with the same supplier base, it’s not strategic.

And then there’s the most common use of spend analysis in an organization that knows how to use it. Ad-hoc queries to determine if a (duplicate) invoice is being paid twice, if the wrong amount was paid to a vendor, if a department is on budget, if a category has enough spend to warrant a sourcing event, etc. Not strategic. Very important, but not strategic.

The reality is that very few events are strategic, because very vew categories are strategic. Unless it’s a unique product or service, unless the spend is a significant percentage of organizational spend, unless the product or service directly relates to a (long-term) organizational goal, or unless you’re looking for a strategic-partner to share in development, production, costs, or risk (mitigation)s, it’s probably not strategic. It’s probably still important, because every cent and resource counts in today’s economy, but let’s stop confusing tactical with strategic.

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Cultural Intelligence IX: Mexico

This series is edited by Dick Locke, SI’s resident expert on International Trade, author of Global Supply Management — A Guide to International Procurement (which was the definitive guide for almost a decade), and President of the Global Procurement Group and Global Supply Training which regularly gives seminars on International Trade and working with International Cultures.

As highlighted in last year’s post on Overcoming Cultural Differences in International Trade with Mexico, while Mexico is part of North America, there are significant differences in doing business in Mexico when compared to Canada or the United States. For example, as appropriately summed up in Richard D. Lewis’ When Cultures Collide, while the Mexican gives freely to his guest, conducting business and obtaining many social services incur a cost which is normally obviated in U.S. and Northern European societies. Mexican civil servants, officials, and police are paid very little and usually seek to augment their meager salaries by accepting what Americans call bribes to facilitate the granting of permits and other services.

With respect to Locke’s seven key cultural differences (first outlined as six in his classic text on Global Supply Management), power distance is very high with severe power distances between those at the top and those at the bottom. While the modern factory may work on the clock, Mexico is an authoritarian polychronic culture and punctuality is nowhere to be found on their list of priorities. You’ll have a higher rank than the seller if your money “talks” with respect, as long as you don’t bring a lot of uncertainty to the table (as they don’t like too much uncertainty, though some is okay). While harmony doesn’t have the importance it has in other countries, honor, obedience to authority, and group loyalty is very important. On the other hand, due to their exceptionally high emphasis on personal dignity, they need to save face at all costs. Despite their rankings on Hofstede’s individualism scale, they are actually quite individualistic and very personal.

With respect to verbal communication, Mexicans are generally very direct, but like Korea, “no” can be indirect. The volume is usually moderate as their style is toned down, warm, and gracious, but as in India, you can get louder if you are passionate about what you are saying.

With respect to non-verbal communication, facial expressions are common, as they are a passionate people, gestures are normal (but, as always, avoid the US ‘OK’ sign), touching is common (and they commonly hug and backslap each other) and essential between friends and colleagues, and body position is relaxed (just don’t put your hands on your hips or in your pockets). They tend to stand close, make eye contact (and if they don’t, it’s a sign of respect), and show their emotions.

Meetings are generally social, and business is often discussed over lunch. However, business lunches are not power-business sessions. Ideas, concepts and possibilities are discussed, not specifics. The only exception is if the detail has been pre-negotiated and agreed to beforehand, in which case it’s time to seal the deal over a meal. Negotiations are slow, involve lots of haggling, but only after they get to know you. It’s important to always keep your hands visible at a meal.

It’s also important to remember that while it is perfectly acceptable to discuss business over lunch, it is not acceptable to discuss business over dinner (except in very exceptional circumstances, and only if initiated by the host). Mexican people make friendships first (business comes later), and they often do this over dinner.

Finally, people from the United States need to remember the historic “difficulties” between Mexico and the United States. What US Marines call ‘The halls of Montezuma’ is a national monument to the revered Ninos Heroes. Every Mexican schoolchild learns that these six young cadets committed suicide rather than surrender to the invading US military. And the last time the US military invaded Mexico they were chasing Pancho Villa. He went on to become President of Mexico and there’s a street named after him in nearly every Mexican city.

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Solving the 2011 Supply Chain Budgeting Dilemma

A recent post over on Supply Chain Matters by Bob Ferrari discussed the 2011 supply chain budgeting dilemma. According to Bob:

Input commodity prices are again on the rise. A recent Wall Street Journal article (paid subscription may be required) notes that in food products, metals, energy and other commodities, prices are again on the rise. As an example, because of the severe crop failure in Russia, wheat prices have risen 34%. In one year, corn is up 44%, milk 6.5% and cheese 29%. Copper is up 30% and other metals such as steel, aluminum and other metals are on the rise.

The implication is that in many industries, firms are determining whether increasing costs will be passed along in higher prices, or will be absorbed or buffered by reduction of costs in other areas … supply chain cross-functional teams will again have to ascertain what assumptions, plans and programs will need to either be accelerated or deferred in 2011.

In our view, these challenges come at a very unfortunate time. Now, more than ever, teams need to be prepared with the supply chain planning and execution capabilities required for the post-recessionary recovery. Most companies who survived the global recession have done so by severe cost cutting and reduction of headcount. While balance sheets remain cash rich and profitability remains at high levels, supply chains are probably the highest state of lean than they have ever been in the last decade.

It’s a bad situation, but it doesn’t have to be. There’s an easy fix. Stop hoarding cash, buy some new systems to increase your team’s productivity, add a few top guns, and go to work on controlling costs along the board. I know it’s never that easy in practice, but it should be.

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P.S.  (Shameless plug.) If you need help selecting those new systems, both Bob and I can help.