Monthly Archives: February 2009

Be Smart About Working Capital

Now that we’re in a credit crunch, articles are cropping up everywhere with “ideas” on how to win more working capital. Some are good, some are not-so-good, and some are downright dangerous. To make sure you know which method falls into which category, I’ve decided to collect the most common “ideas” into one place and categorize them for you, so you don’t have to worry about selecting the wrong method and jeopardizing what might be an already hazardous cash-flow situation.

The Good

  • Cash-Flow Forecasting
    Identify the periods where you will need cash well before they happen so that you can dialogue with your customers, suppliers, and bankers to get you through those periods of cash-negativity.
  • Move to More Sustainable Product Lines
    Make sure that even if you’re in trouble now and have to “weather the storm” for the next few months, you’ll be in a state of financial health to take advantage of the opportunity when the market comes back — because history will compete and it will come back strong when it does.
  • Customer Relationship Management
    Understand your customers’ cash-flow situations, when they can pay, and how this will affect you. If they can’t pay on time, and you need cash, you need to know in advance so that you can arrange to borrow against, or sell, the payable. If they can’t pay on time, and you can wait an extra 30 days, agree to treat it as a “cash loan” and charge a fair interest premium. It will save your customer money while improving your future cash situation.
  • Inventory Optimization
    Inventory costs you overhead. Up to 30% or 35% of the product value. Streamline your supply chain and take out as much inventory as you can. It will improve your cash flow by reducing cost and improve your cash flow by reducing the amount of working capital tied up in inventory.

The Bad

  • Identify Cash-Thirsty Areas
    Knowing where you need cash isn’t good enough. You need to know why. If it’s a failing operation or product lines, you need to axe it and refocus on more profitable operations or product lines.
  • Focus on the Biggest Projects First
    This might sound good in theory, but the biggest projects might not yield the largest cash savings opportunities. If it’s a people intensive project, you can’t just cut people and expect to reduce cash-flow. In the short term, with legal costs and severance pay, you’ll increase cash-flow. Then, when you need to hire them back, you’ll have recruiting costs, HR costs, and ramp-up costs. Sometimes the smaller projects, such as replacing a telecommunications infrastructure when you might be able to save money just be renegotiating a new support agreement with a lower-cost service provider, might have larger savings opportunities.
  • Shift Inventory to Suppliers
    While VMI is good if done right and implemented up-front (so that products are not produced until needed), forcing your suppliers to hold your excess inventory (without warning) is bad as your suppliers will be counting on your payment to pay their raw material suppliers and payroll, which could worsen their financial situation to the point of bankruptcy.
  • Factoring as your Main Financing Strategy

    Although factoring sometimes makes sense if you can get a good deal and it will cost you significantly less than a loan, relying on it as your primary fall-back strategy is problematic, especially if a number of your suppliers all of a sudden get their credit worthiness downgraded.

The Ugly

  • Extending Days Payable Outstanding Across the Board
    If a strategic supplier is hurting, and you’re its largest customer, this might force it into bankruptcy. What’s that going to do to your already ailing cash flow when you have to rapidly switch to a higher cost supplier and expedite shipments?
  • Use a Debt Collection Agency
    Nothing improves supplier relations like a third party collection agency that will call your supplier everyday and threaten to sue its deadbeat ass off. Just don’t do it.

Carbon: Hype, Reality, and Management

Supply Chain Consulting recently published a pair of white-papers on “Carbon, Hype & Reality” and “Mastering Proactive Carbon Management”, that provide a decent starting point for a company just starting down the path to addressing it’s carbon footprint and getting it under control.

In Hype & Reality, Supply Chain Consulting cuts through the hype to the simple facts of carbon management, which are:

  • Everyone can contribute to effective energy management
  • You can’t compete on green unless you are green
  • You can’t claim carbon emission improvements without benchmarks and auditable processes
  • If you’re not committed to carbon management, you’re not corporately responsible in today’s marketplace

It also summarizes the status of global green house gas regulations in the US, Australia, China, and the UK. Highlights include:

  • Australia
    Mandatory legislation that requires mandatory reporting of any company facility that emits more than 25,000 tons of carbon dioxide-equivalent annually. Companies that don’t register or that report inaccurate numbers will be fined as much as $220,000.
  • China
    China has set a target to reduce per unit GDP energy consumption by 4% annually by 2010 with an aim to raise this to 20% in the near future.
  • United Kingdom
    The UK Climate Change Bill became law in 2008 and brought the Carbon Reduction Commitment with it that makes base-line emission reporting mandatory in 2008 and 2009 and reductions mandatory starting in 2010.
  • United States
    President Obama plans to set ambitious reduction goals and some states, like California, have moved ahead on their own.

In Mastering Proactive Carbon Management, Supply Chain Consulting presents their 5-Step Model for achieving a green supply chain.

  1. Master the Basics
    Start by educating employees about the importance of carbon management and going green to build awareness and develop an internal focus on improving basic operations.
  2. Involve the Company
    Begin your carbon journey by completing a static carbon footprint analysis which will help you identify improvements that will reduce energy usage and lower carbon emissions.
  3. Map Your Processes
    Progress to automating your carbon management efforts that will allow you to capture a “live” footprint at any time that includes internal and external supply chain processes. This allows you to consider carbon impacts in your sourcing and production decisions and reduce emissions up-front.
  4. Footprint Your Products
    Take your processes to the next level so that you can allocate your carbon footprint by product line. This allows you to target your worst offenders first and identify which lines have the most reduction opportunities.
  5. Optimize Your Supply Chain
    Re-design your entire supply chain to create an eco-friendly network.

Tools To Help You Tame the Wild Web

Google’s good, but when you search for terms like sourcing and purchasing, chances are that in addition to a few relevant hits, you’ll also get a few million, mostly irrelevant hits, in response to your query. There’s got to be a better way to find what you’re looking for, right? Most likely, and a number of companies are endeavoring to build the next Web 2.0 tool that will help you in your quest. In addition to PurchSearch, the following Web 2.0 tools are vying for your attention and hoping they will make your quest to tame the wild web just a little bit easier.

FiltrBox

A new market intelligence offering, Filtrbox is an advanced search tool that constantly monitors online media and delivers to you the most relevant, credible mentions of the critical things you need to track.
It allows you to track multiple searches at once through a single interface, embeds constant monitoring technology that is like a real-time version of Google alerts, and maintains a history that allows you to see what the most relevant result was at any instant in time. Finally, you can create custom RSS fees that combine only the most relevant posts from all the feeds that you monitor.

FeedScrub

Feedscrub is an intelligent RSS aggregation and content filtering tool that dynamically learns your preferences as you “save” posts you like and “scrub” posts that you don’t. It supports NetVibes, import and export via OPML, and Google Reader.

Krawler[x]

Krawler[x] is a desktop application that lets you manage your online and offline content with tags that can be used for quick search and retrieval. It also lets you share content, create communities, manage your RSS feeds, and interact with a peer-to-peer social network. It also supports version management, desktop-based collaboration, and supports multiple protocols that combine to create a seamless tool that serves as content creator, content publisher, content sharer and distributed content search engine.

In short, if you’re suffering from a content shortage despite the information overload clogging your RSS feeds and Google Searches, there are tools to help. And while they’re not perfect, despite their relative lack of value to the enterprise, Web 2.0 technologies are showing promise in the consumer world and just might make your on-line travels a little easier.

Vince Kellen’s Technology Duds for 2009

Industry Week recently made my day when they published Vince Kellen’s (Senior Consultant of Cutter Consortium) five “anti-trends” for 2009 which stand out as a brilliant counterpoint to the rose-colored predictions of the laissez-faire wannabe analysts that tend to dominate the technology landscape. Probably because they echo my own sentiments and a few of the messages I’ve been trying to get across for quite some time now. So what were they?

  1. Social Networking will Unravel
    Kellen says “at the risk of offending Web 2.0 enthusiasts, most firms, especially those hardest hit in this recession, consider social networking speculative and in some cases frivolous“. Hear, Hear! There’s a reason why “facebooked” has become an urban slang slam, “myspaced” has become a synonym for a late-night booty call, and why the blogger elite (including the doctor and Loren Feldman of 1938 Media) slam Twitter on a regular basis (as the only thing you can do with it is say nothing in only 140 characters). There’s no real value in these technologies, and certainly no commercial value to a productive business.
  2. Mashups will get Peeled Back
    Speculative ROIs or projects not directly assisting with significant savings are going to be difficult for IT leaders to advance, and since the only “Web 2.0” technology that has less ROI and more speculation than a Mashup is social networking, these projects will be axed too. While mashups can be a useful component of B2B 3.0 platforms if they focus on enhancing content, community, and connectivity, on their own they are just useless eye-candy.
  3. Large-Scale VoIP and Unified Communication Implementations Will Be Muted.
    Although such projects promise long-term savings, unfortunately, at least in North America, they represent high up-front investment costs with a long-term payback period due to our still ridiculously high-costs for high-bandwidth access with service SLAs. As a result, these projects will be back-burnered until the economy hits another high-point and executives again don (or is that dawn) their rose-colored glasses.
  4. Analytics and Business Intelligence (BI) Will Lose Luster
    Although a sound data analytics package (you know the one) in the hands of a true expert (you know who they are) will find you limitless savings opportunities, the reality is that most of the offerings on the market are just static data warehouses with static reports in the hands of recent grads with little real-world experience and almost no training. As a result, the majority of solution providers have been over-promising and under-delivering for years, and the market, understandably, has become fed up. As a result, even though these are the times when a real data analysis solution is needed most, many projects will be scrapped and only the true innovators (which are a small minority of the market) will undertake projects to identify and acquire sound BI solutions.
  5. Aged Infrastructure Will Stay in Service Longer
    “More companies with way-past-their-prime architectures will attempt to coax them along for another year“. And this is unfortunate. While I applaud the inevitable push-back on social networking and useless Web 2.0 technologies, and understand the delay on VOIP and BI (as the value just isn’t there in some cases), I am saddened by the truth of this prediction. You see, technology infrastructure improvement offers companies a great opportunity to reduce cost and go green at the same time, thanks to new virtualization, thin-client, and innovative cooling technologies. Not only do green solutions generally offer payback starting in year two, but they last twice as long, effectively reducing your Total Cost of Ownership between 50% and 90% over a five to six year time-frame. And with cash-flush companies like IBM (who had a record profit year in 2008, and predict another one in 2009) able to offer low-cost financing if you can’t afford the up-front purchase and implementation costs, it just doesn’t make sense to delay this investment. (See my posts on greening your data centers, greening your desktops, and calculating your savings for more information.)

Managing The Purchasing Factory


Today’s guest post is from Pierre Mitchell, Director, Procurement Research and Advisory for The Hackett Group.

Dave Nelson, the CPO from John Deere, co-authored a book titled “The Purchasing Machine“. The book was good, but never explained the meaning of the title. It did however get us thinking about the analogy of a factory to a Procurement function, and how Procurement can apply Lean Manufacturing principles to its operations.

Many companies are currently implementing Six Sigma methodologies, and both Lean and Six Sigma emphasize a focus on the customer and the elimination of waste. Six Sigma’s “DMAIC” methodology can very easily be applied (and is being applied at some progressive organizations):

  • Defining the needs of procurement’s internal customers,
  • Measuring the criteria of success (e.g., supply assurance, savings, supplier innovation, etc.),
  • Analyzing the current situation (e.g., too many suppliers, too many ways to buy, etc.),
  • Improving the processes (i.e., the “opportunity identification” step in a sourcing methodology), and
  • Controlling processes to “hold the gains” (e.g., contract compliance) through fail-safe processes.

This is foundational and fundamental stuff. However, applying lean manufacturing techniques to the “white collar factory” of sourcing and P2P (Purchase-to-Pay) is a mostly untapped area of opportunity.
Interestingly, some procurement organizations have named themselves “Supply Chain Management” even in non-manufacturing environments (e.g., Bank of America), but yet they always haven’t taken to heart key practices that manufacturing organizations have put in place on the shop floor. This is unfortunate, because it can be done.

Managing the “sourcing factory”

One way to view strategic sourcing is that of a Configure-to-Order business that “manufactures” highly profitable services. How profitable? For every $1 invested in procurement, world-class procurement delivers $7 to the firm, and that number goes even higher when looking at strategic supply processes. Unfortunately, there is a backlog of work because there is not enough investment in the bottleneck work centers (e.g., commodity managers), and not enough profitable services are getting out the door. So, attacking the bottleneck is critical, but funds are not unlimited to purchase more capacity, and must be freed from other areas (e.g., transactional processes) while improving “yield” through better work methods and measured doses of appropriate automation (e.g., freeing up commodity manager’s time via better spend/supplier analytics).

Another issue within the sourcing factory is aligning capacity to customer expectations via a “Capable-to-Promise” model. Various types of standard sourcing services, and their associated lead times and quality levels, should be offered up to customers based on finite capacity, and then configured to order. Without segmented “flow lines” (e.g., simple negotiations versus complex ones), standard lead times, capacity planning, and demand management (e.g., setting rules by which procurement must be involved in sourcing), the factory is going to be backlogged, quality will suffer, and customers will be very unhappy.

Designing what you can manufacture

The end of the sourcing factory is not the contract. A sourcing service is only profitable when preferred agreements are actually utilized within the “P2P factory” (where orders are placed and bills are paid). Unfortunately, they often aren’t. For the average company, our benchmark data puts overall bypass/maverick spend at 10%; but the real problem lies within indirect spend. A custom study that we did with 200 firms on contract management revealed a 23% maverick spending figure for influenced indirect spend. This translates to $11 million in lost savings per billion in indirect spend for the typical company. The problem with this $11 million of “scrap” is that the design of the Source-to-Settle process didn’t adequately consider the downstream processes of P2P (or supplier management and development). Strangely, every strategic sourcing methodology includes a “stakeholder management” process, yet the methodologies rarely explicitly define how P2P processes and systems will guide users to preferred supply sources and optimal buy/pay methods. It’s important to make strategic sourcing staff accountable for maverick spending (and not just savings). Treat P2P process users as customers – key stakeholders – and utilize thoughtfully designed downstream processes such as P2P and supplier management and development.

Converting the P2P job shop to flow lines

Most companies claim they have a defined P2P process, but if you scratch the veneer, you’ll find issues — e.g., only one-quarter of typical firms have single accountable P2P process owners. Frankly, some companies’ P2P processes are positively medieval, with each transaction handcrafted in a manner befitting the purchaser trying to get it through the system. If a firm has moved into the industrial age of P2P manufacturing and does have any P2P methods defined, it is likely the venerable three-way match. In manufacturing vernacular, this is known as a “job shop” — a “one facility fits all” general purpose processing capability, where everything goes in on one side and hopefully makes it out the other. If it’s an ERP environment, it’s “one system fits all”. In Lean manufacturing environments, flow lines (or “cells”) are set up based on families of similarly-made parts; for P2P processing, firms should define tailored transactional flow lines beyond the 3-way match, to include p-cards, assumed receipts, Evaluated Receipts Settlement (ERS), invoice-to-contract matching when POs not required, etc.

Papers from Hackett’s Purchase-to-Pay advisory program describe these concepts: “”Using an Optimized Transaction Strategy to Achieve P2P Efficiency”” and “A Management Primer for Balancing Risk and Control in P2P”. By designing a “P2P manufacturing” factory with transactional flow-lines that are fit-for-purpose, efficiency and effectiveness will invariably improve.

Thanks, Pierre!