Monthly Archives: April 2008

China Matters Less

It looks like my predictions that the China craze may soon be coming to an end, first expressed in mid-2006 when I asked if low cost country sourcing to China was really innovative, are coming true. Consider this recent Slate article that points out how we’re now in the last days of cheap chinese and how we are about to start paying more (and, in some cases, a lot more) for clothes, electronics, toys and just about everything else.

Thanks to irrepressible inflation, soaring prices for raw materials, oil costs over 100 a barrel, and China’s Generation Y, the era of cheap Chinese goods is coming to an end. Some Chinese factories are now asking their American customers for price increases of as much as 20% to 30% – and getting it.

No longer is China desperate for foreign investment. No longer is there excess capacities in every industry. No longer are there millions of unemployed Chinese extremely desperate for city employment (as now there are millions of employed Chinese desperate for better wages). No longer is the Chinese renminbi extremely undervalued. And, most importantly, no longer are government officials turning a blind eye to every labor and environmental violation being committed in the country.

Unions are on the move. In January, Beijing introduced a new labor law that significantly strengthened the influence of the union in management decisions and the All-China Federation of Trade Unions, the country’s state-backed labor organization, has launched an aggressive recruiting campaign.

China’s Generation Y (born after the one-child policy came into effect) are increasingly aware of their rights to a legal wage, health insurance, and a certain number of days off every month – and they want them. As the article points out “already, southern China’s Guangdong province, known as ‘the workshop of the world’, is short 2 million workers, the equivalent of 14 percent of America’s entire manufacturing workforce”.

Does this mean that importers who currently rely on China are going to move away? Not likely. There are no other countries waiting in the wings to be the new China, just like China was waiting in the wings to be the new Mexico years back. Vietnam? It only has 85 Million people and only a fraction of its population is suitable for factory work – plus it’s inflation is faster than the rest of Asia. India? It can’t get its act together, it’s transportation system is a mess, it’s not set up for volume, and with an educated populace in many of its cities that speaks reasonable English, it’s going after the higher paying jobs in the information economy. Kenya? Madagascar? A ways off, at the least.

In other words, China is here to stay – but many of the “advantages” it had, especially where costs are concerned, are now gone. Get used to it … and in addition to paying a lot more at the pump, get used to paying a lot more in the stores as well.

SourceOne scores a Grand Slam with WhyAbe

Gartner recently named Source One’s (acquired by Corcentric) free WhyAbe.com (sunset) platform as a Cool Vendor in Procurement and Finance for 2008. This is a big score for the sourcing and contract management toolset, when you consider that not many sourcing providers get this recognition from Gartner and that previous winners have included FreeFlow, Vinimaya (rebranded Aquiire, acquired by Coupa), and BIQ (acquired by Opera Solutions, rebranded ElectrifAI) – the latter of which are really cool vendors.

Source One, a Procurement Service Provider (PSP), is a fairly major player in the strategic sourcing & cost reduction consulting marketplace, having been incorporated back in 1993 – well before companies like FreeMarkets (now part of Ariba) made strategic sourcing vogue, and many of their consultants have over 20 years of experience in the field. They take the traditional approach to sourcing projects with a two part project team (consisting of Source One personnel who do the project and Client personnel who sponsor and manage the project on the client site), as compared to the resource augmentation approach some of the newer consultancies take. The approach may seem heavy to a smaller organization, but the results speak for themselves. With an average savings of 18% across 60+ categories (whose average savings range from 5% to 25%, while some outliers, like cash management, are as high as 90%), when they say their aggregated purchasing power allows them to secure exceptionally competitive pricing, they mean it. And from what I hear, they’re doing so well that it’s a daily struggle to keep up with a constantly increasing demand for their services. (P.S. They’ll be making a big announcement at ISM next month. You might want to watch for it.)

But let’s talk about WhyAbe.com. From a technology perspective, RFX, Reverse Auction, and basic Contract Management is nothing new … basic solutions for the former has been available for over ten years and a basic solution for the latter for at least seven years. There’s nothing new about cookie-cutter on-line stores or stripped down supplier networks either. What is new is the fact that it’s totally free.  WhyAbe.com is cracking the sourcing mold and offering a free solution that companies new to sourcing and sourcing technology can use and experiment to find out what works for them, what doesn’t, and what they need help on. It’s a great way for a company to test the water as it provides a quick start to e-Sourcing with a price that can’t be beat. Then, when an organization has identified it’s needs, and, more importantly, identified what it can do well in house – and what it can not, it can always upgrade to a more extensive e-Sourcing platform and retain a PSP, like Source One, to help it with those categories that it doesn’t have the experience, or the leverage, to get savings on. Furthermore, should it retain Source One, it can still use the tool as a way to work with the PSP. In other words, even though there’s nothing new from a technology perspective, the model is very cool and I think they deserve the Cool Vendor award for it. If nothing else, it will force some of the stagnant providers in the e-Sourcing space that haven’t done much with their solution for 2, 3, 5, and in some cases, 7 years to update their offering to provide real value for the $$s they’re charging, or fall by the wayside to make room for the new innovators. And that’s a win for the space you can’t argue with!

10 + 2 = 690,000,000

CBP. ACE. C-TPAT. SAFE Port Act. You’d think importers already had enough documentation and security initiatives. Apparently not. The U.S. Government recently announced the “Secure Freight Initiative” in an effort designed to help reduce the risk of terrorism by leveraging trade data, trade partnerships, host country governments and the latest technology to validate the security of goods in maritime shipping containers. Part of this initiative contains a more detailed Security Filing that is being dubbed the “10+2” because it requires 10 data elements from the importer and 2 data elements from the carrier that must be electronically filed 24 hours prior to loading cargo onto a shipping vessel ultimately bound for the US.

The goal may be to:

  • target high-risk cargo through the identification of actual cargo movements,
  • improve the accuracy of cargo descriptions, and
  • speed lawful international trade by recognizing low-risk shipments earlier in the supply chain

… but all it’s likely to do is increase trade costs even more. According to a recent Supply & Demand Chain Executive titled “102 – Whats a US Importer To Do?” article, it’s estimated that this new 10+2 program will cost importers $390M to $690M annually due to filing fees levied by the government and surcharges levied by cargo agents for generating the required information.

And, let’s face it – it’s not going to negate the risks it is intended to negate. All it is doing is letting a potential terrorist (who cracks the system) know well in advance which shipments are likely to be identified as “low risk”, and, thus, which shipments provide the greatest opportunity for smuggling his weapons. Furthermore, pre-filing data elements, even if it includes route information, doesn’t necessarily identify high risk shipments – all you can deduce is if a vessel stuck to plan, and you can only deduce that if other global ports are willing to cooperate in your initiative and indicate whether or not a vessel arrived roughly on schedule. In short, the only goal that will be realized is improved accuracy in cargo description – which is valuable, but is a slightly better description worth 690M (or more)?

Considering that most of the data elements are already being provided to customs for clearance and entry via the CBP 7501, why is a whole new initiative needed? Can’t the current programs simply be improved to capture the new data elements and allow earlier submission of the data? It seems to me that this would be a lot less costly to all parties involved for the same net effect, and make a lot more sense. Any trade pros care to chime in?

It’s a Recession, But That’s Okay

World Trade Magazine recently ran a great article by Dan North on “Policy Perspectives: Reading the Economic Tea Leaves: Confessions of a Successful Forecast”. It was short, sweet, to the point, and dead-on – even though it used one of the words that is obviously not in George W. Bush’s vocabulary.

The article points out how many brave economists strayed from the consensus opinion last year because they saw a set of circumstances so compelling that it led them to forecast – very much counter to the consensus at that time – that the economy was likely headed for recession. They were right, and this is the best article that I found that explains why. In short, there were three major forces at work against the economy (and we all know that 3 is enough to cause chaos):

  • inflationary pressures started to bubble
    When the Federal Reserve warned that the economy was growing too fast back in May of 2004, it was right. They raised rates to curtail the effect, but there is normally a lag of at least 3-5 quarters, and more if the market is especially exuberant.
  • crude oil reach a record high in May of 2004 – and then started to skyrocket
    every time crude oil spiked in the last thirty years, a recession followed
  • in August of 2006, the median sale price for an existing home fell on a year-over-year basis for the first time in 11 years
    and this was at a time where the camel could barely stand as the Federal Reserve corrections and crude oil spikes were starting to pile on

Thus, by the summer of 2007, there were three strong negative forces battering the economy. Each on their own had consistently caused recessions in the past. And then:

  • the sub-prime crisis hit
    battering the real estate market with the force of a tsunami
  • other debt crises surfaced
    the storm just couldn’t get any more perfect

A recession was inevitable. But it’s nothing to worry about.

  • First of all, it’s the nature of the market, it surges, it drops, it corrects, and then it emerges stronger than ever!
  • Secondly, these same brilliant economists have noted that the necessary conditions for a quick exit are falling into place and the recession is not likely to last very long, with the recovery curve predicted to start by year end – meaning that we’ll be back to a growth cycle in mid 2009 or early 2010.
  • Thirdly, this is the perfect market for supply and spend management to really take off! Now that savings are on top of everybody’s mind, sourcing and procurement is going to start to get the respect it deserves in all the laggards out there. They’re going to need good solutions. It’s a good time to be a provider of stable sourcing software solutions. Time to kick the development and marketing cycle into full gear. (And don’t make me tell you again where you should be putting those dollars!)

It’s not the Portal or the Network … it’s the Facilitation

Global Logistics & Supply Chain Strategies recently ran an article that asked “if supplier portals were so great, then what went wrong?” that had a really good history of supplier “portals” and some insights into the reasons why they may have failed. However, I have to question whether or not their statement that the survivors have evolved into networks with real value is accurate. But first, let’s review.

As the article notes, supplier “portals” were cheap and easy to set up in the early days, and this was because these “portals” were often narrowly focussed on automating the transaction, getting the buyer the best deal, or allowing a buyer to find a new supplier. As the article also notes, they didn’t take a holistic view of supplier performance management (SPM) and collaboration, and, more importantly, of the sourcing AND procurement process. Furthermore, most of these companies had ill-formed business models or a “me-too” business plan (which was a sure sign of failure – how many outlets do you need for “best-priced” office supplies?).

This meant that many suppliers, including those who originally embraced the “portals”, pushed back, as they quickly concluded that there was little value there for them and that the “portals” were just another means for a buyer to boost his or her discount. Thus, many of the original portals failed.

Today, according to AMR, you have “networks” which offer a single transaction backbone, feature common instances of software for multiple users, provide scalable communications platforms that utilize standard message formats, allow for common applications, and allow members to share customers, suppliers, and service providers. Furthermore, they create a business network that includes retailers, manufacturers, logistics providers, suppliers, contract manufacturers, and other channel partners.

Today’s “networks” are arguably better than the “portals” of yesteryear, but do they, in and of themselves, offer the “real value” purported by the article headline?

Many networks offer instant access to, and identification of, thousands of suppliers. Mostly Worthless – most companies know who their suppliers are and who the main competitors of their suppliers are. They don’t need to identify suppliers. They offer automated document exchange – for a transaction fee. Hmmm … so do most sourcing and procurement platforms, and e-mail is essentially *FREE* if you’re hosting your own servers. They centralize information in one place. So what? So does your monolithic ERP. They offer e-Payment – which is usually calculated as a percentage of the payment amount. In comparison, many banks have ACH services that allow you to do e-Payments for a fixed transaction fee. Where’s the value???

Unless the platform offers real collaboration capabilities (and I’m sorry, but e-mail and FTP document exchange doesn’t qualify), and unless the platform “enables” the supplier, there’s no significant value to the network. What do I mean by this?

First of all, the platform, be it “portal”, “network”, or “marketplace” has to offer as much value to the supplier as it does to the buyer. Not only should it make it easier for the buyer to do business and get a good deal, but it should make it easier for the supplier to do business and negotiate a good deal as well. Capabilities should be bi-directional. If buyers can find new suppliers, then suppliers should be able to notify potential buyers about their capabilities as well and easily query “open” RFIs. If buyers can create questionnaires, then suppliers should be able to create questionnaires and ask questions to clarify a buyer’s need with just as much ease. Document sharing is one-thing – real time collaborative document creation is another.

Furthermore, in addition to allowing a buyer to pay electronically, it should allow a supplier to electronically submit its invoices and manage its payment terms. For example, if the supplier agreed to 90 days net, they should be able to offer *different* discounts for 30 days and 60 days. It should allow a supplier to manage all of their purchase orders, shipments, and goods receipts as well as allowing a buyer to manage the same. It’s all about enablement – and if the “portal”, “network”, or “marketplace” doesn’t enable the supplier to serve the buyer, and themselves, better – the value of such a solution is limited and it too will disappear as fast as some of the dot-com busts of the last decade.