Monthly Archives: September 2009

When Will Organizations Learn That Complex Software Is Not Easy!

A recent article over on Procurement Leaders titled “software procurement blunder grounds vital military helicopters” has me fuming.

First of all, it contains the phrase “procurement blunder” when the blunder does not appear to be the fault of the Procurement department, but the fault of idiots higher up.

Secondly, it contains the statement that an organization should “cut costs by developing its own software“.

I guess I should step back a minute and summarize the article. The UK MoD (Ministry of Defense) purchased eight (8) Chinook Mk3 helicopters in 1995 from Boeing which were delivered in 2001 at a cost of £259 Million. As of 2007, they were still not deployable because they could not be flown in poor visibility or at low altitudes because they were missing key operational software. This software, which would only have cost £50 Million (which is only 2.5% of the purchase price of the eight helicopters), was not included in the purchase because the UK Treasury demanded the MoD cut costs by developing its own software.

This is just nuts in so many ways. For starters:

  • Over 90% of software projects fail to come in on time and on budget.
  • Complex software systems, especially operating systems, typically require thousands of man years to develop. Red Hat 7.1, which only has to operate a PC and not a complex military helicopter with dozens of systems and hundreds of controls, required about 8,000 man years of development effort.
  • Complex (operating) systems can only be built by senior developers, which, fully burdened (with salary, benefits, hardware, and software costs), will cost you about 200K / man year.
  • This says that 100 M (slightly more than £50) only buys you 5,000 man years.
  • Even if your programmers knew exactly what to do, it’s doubtful you could even match the market cost of an already developed system which is being amortized over a large group of buyers.
  • The only way the MoD could make the helicopters flyable was to spend untold millions stripping them down to Mk2a configurations, which also delayed their deployment for 2 or more additional years.

But, more importantly, you’re trying to save pounds by pinching pennies! That never works! It would have been much more logical to try and find ways to reduce the purchase price of the helicopters by 2.5%. For example, could the purchasers have worked with Boeing to help them execute more strategic sourcing projects to reduce Boeing’s cost in a savings-split? Could UK MoD manpower have been lent to Boeing? Since most purchasers believe in the old maxim that you can take 10% off of the cost of anything, how hard would it really have been to reduce costs by 2.5% to cover the software costs if Procurement was allowed to be creative instead of having to deal with idiocy pushed down from the top?

Dietary Changes to Our Risk Appetite

Share This on Linked In

Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.

The cover story of the June 22nd, 2009 issue of Information Week magazine was titled: “What’s Your Appetite For Risk?“. The article was part of the magazine’s annual security survey.

What we initially learn in the article should be of little surprise: the recession is taking its toll on all aspects of company operations, including investments in technology security and compliance, though these two concepts should not be confused with one another. A lot of focus was given to security and compliance within cloud computing.

With budgets stressed and spending trimmed, the appetite for risk has been forced to grow a little larger as priorities are examined in more detail to determine where — and how — limited dollars should be spent. As the article continues, compliance requirements are getting funded to keep (public) companies surviving from one audit to the next, but that doesn’t really mean that risks are being managed properly.

A reader of my blog posts (on Sourcing Innovation) contacted me in early July to tell me about a supply chain risk management success story. Nick Woods is in the public relations department of Red Prairie, a software company that specializes in warehouse management, transportation, and workforce management solutions. Nick shared with me a press release on the implementation of Red Prairie’s warehouse management solution at Sargento Foods who is known for their cheeses, sauces, and snacks.

In the press release, the VP of Logistics at Sargento Foods, Dennis Roehrborn, was quoted as stating: “By upgrading the solution in our Plymouth, Wisconsin distribution center and satellite plants in Kiel and Hilbert, we are better equipped to exceed customer expectations for accurate order fulfillment and on-time delivery.”

While there are many risks to supply chain operations, the failure to meet customer expectations is certainly a critical one. Regardless of how great your product is few customers will tolerate repeated supply chain disruptions that increase operating costs and result in a failure to cost-effectively get the right product on the store shelf when the customer wants to buy it.

Here is a great example of a company who recognized risk and managed it by investing in the necessary technology. Mr. Roehrborn also states that the implementation was minimally disruptive to existing operations and that productivity target goals were exceeded with the new software.

Seems to me like Sargento Foods has such a large appetite for its supply chain relationships, (and probably a good appetite for the quality products they produce too), that they decided to put themselves on a diet when it comes to risk.

The need to exceed customer expectations is even more important in a recessed economy, and companies must proactively assess the risk of losing sales and customers versus the cost of doing nothing. Managing risk doesn’t require taking bigger bites than you can swallow at one time — that would be foolish when tackling most any project. Even if you have to nibble at it a little at a time, chewing carefully and thoughtfully, make the investments necessary to little-by-little reduce risk and improve performance.

And don’t forget to brush regularly and floss daily.

Norman Katz, Katzscan

e-Leaders Speak: Kevin Cornish of Aravo on how “Managing Supplier Risk Helps You Thwart Zombies, Mavericks, and Other Threats in the Supply Chain”

Share This on Linked In

Today’s post is from Kevin Cornish of Aravo.

Once the economy begins to rebound, some companies may start to scale back their risk management efforts.

Don’t be one of them.

If we’ve learned anything from this recession it’s that in today’s volatile global economy, businesses need to pay more attention to risk, not less. And, while there have been signs that the world economy is beginning to heal (Bloomberg), Federal Reserve Chairman Ben S. Bernanke and others have cautioned that the recovery is likely to be both muted and prolonged.

In other words, now is not the time to ease up on scrutiny of the financial scorecards of your critical suppliers. Why? Because we’re not out of the woods yet, and because you don’t want to unexpectedly find yourself relying on a “zombie” supplier, a business that is so undercapitalized and overleveraged that it’s essentially dead. A zombie supplier won’t be able to raise the money required to get itself back online — and that means it won’t be able to deliver the parts you need to your door.

Of course, fine-tuning your supplier risk management strategies can have other benefits, as well. For instance, as we’re digging out from the worst recession since Word War II, it will continue to be critically important to keep an eye on costs, and getting your supplier house in order can go a long way to reducing another sourcing threat that’s too often ignored: maverick spend.

Maverick spending may be costing you more than you think — not only in terms of per unit price, but with regard to leverage lost in future negotiations, as well. What’s more, it’s probably happening more frequently than you realize. In one study, over half of the employees surveyed (57%) considered it acceptable to make off-contract arrangements if they can get a better deal.

Earlier this year, a procurement trends report co-sponsored by OfficeMax and Purchasing magazine revealed some intriguing statistics regarding office spend. Take a look:

Percent of office spend under management by procurement
0-20%   :   9%
31-60%   : 21%
61-90%   : 36%
91%+: 34%
Average contract compliance rates
0-20%   : 16%
31-60%   : 12%
61-90%   : 41%
91%+: 31%

That data tells me that most businesses have plenty of room for improvement when it comes to optimizing purchasing power, improving compliance, and achieving total cost management — all of which stems from knowing, and managing, supplier information with diligence, transparency, and risk awareness.

A year ago, businesses were pre-occupied with supply risk. Then, concern shifted to supplier solvency risk. Now we’re back to keeping one eye on commodity prices, even while we’re on the lookout for zombies, mavericks, and a variety of other supply chain threats (compliance, environmental regulations, sustainability concerns, etc.). Without a doubt, the lens of risk is constantly changing. However, successful companies don’t just throw out the eyepiece when it no longer works. Instead, they repeatedly readjust their focus so that they can better respond to both the threats and the opportunities in today’s business environment.

Thanks, Kevin!

Characteristics of World-Class Supply Management Organizations

Share This on Linked In

Bob Rudzki, President of Greybeard Advisors, author of Beat the Odds, and blog master of “Transformation Leadership” recently penned a piece for Chief Executive on “Supply Management”. It is, of course, a great piece that summarizes how world-class organizations are different and how their leaders adopt aggressive objectives and focus on key categories that will make a profound difference in the short and the long term. Specifically, world-class leaders in supply management

  • set revenue enhancement goals and work with suppliers to achieve them,
  • pursue achievable year-over-year cost reductions,
  • develop expertise in commodity risk management,
  • focus on optimizing working capital,
  • institute “asset recovery” programs, and
  • optimize capital project costs.

This is because the total impact from a comprehensive supply management transformation involving all of these core initiatives can be enormous. An manufacturing company with an 8% (or less) ROIC can transform itself into a 20% performer. That’s huge.

For more information on how your company can achieve these improvements, check out “the hidden lever”, his tips to “avoid corporate death”, and the many greybeard resources.

e-Leaders Speak: Jason Hekl of Coupa on “The Future of Sourcing is Crowd-Sourcing”

Share This on Linked In

Today’s guest post is from Jason Hekl of Coupa.

Coupa has a unique point of view on expressive bidding, sourcing for best value, hiring and retaining deep category expertise, and multi-variate supplier bidding. It’s just not necessary for most of us.

The future of competitive sourcing won’t be centered on how to buy steel from China; it will be centered on how to buy the everyday goods and services we need to operate and thrive in a knowledge economy dominated by services business – items like IT equipment, office supplies, travel, temp labor and marketing consultants. And success there won’t be determined by supply chain experts with 20 years of category expertise. It will be up to you and me.

The future of sourcing is in CROWDS.

As information proliferates over the web, and more and more markets become increasingly transparent, pricing has become more scientific. Think airline seats. Don’t like the price of your aisle seat? Just wait ten minutes and check again, the price may very well be different this time around.

It’s naive to think a few individuals in the procurement department can single-handedly negotiate contracts that will always ensure the business gets the best price. With a few exceptions, business, and information, moves too fast for that to be realistic. The better strategy is to rely on the wisdom of the crowd to source the best deals and drive savings for the business.

Employees have always looked upon the purchasing department and preferred supplier agreements with suspicion. They know, especially now, that they can beat contract prices very easily doing a basic amount of research online. Let’s face it – the information is out there. And there’s no way to stop it. Spend management initiatives built around a ‘need to know’ mindset that controls the flow of information are doomed to fail. There’s just no way hold back that wave. So don’t.

Ride the wave instead! Don’t limit your people by restricting information flow or artificially controlling the options available to them. Empower your people to use what they know to save the company money. Think of the psychological impact and benefit of a grassroots effort inside the company – every employee has an opportunity to save the company money with every requisition they submit. Even if it’s just pennies at a time, it still adds up.

I’m talking about expanding the responsibility for finding the best deals and saving the company money beyond the procurement department. Afford every employee an opportunity to identify and capture greater savings for the business by making it easy for them to do exactly as they do with their own money – scour the web for deals. Don’t handcuff them to a handful of suppliers with negotiated discounts. Empower them to find deals anywhere on the web, and then pull them into the a purchasing platform that controls and automates the approval and ordering processes. We all buy stuff. Who doesn’t get excited by finding a great deal? Why not put that dynamic to use for the business’s benefit? Let your employees use their expertise, and the web, to find the best deals on the items they need to do their jobs.

A procurement organization, even with decades of collective experience, can’t possibly be expert in every category of spend, and quite frankly, even if it were, how much incentive is in place for the procurement manager to go out of his or her way to find the best price on every ad-hoc purchase? No, let the procurement organization focus on the big initiatives, and empower your employees to get what they need, quickly and easily (it’s got to be easier than the ‘expense it and forget it alternative’ that removes all control and visibility from the purchasing process). Trust the system you put in place to control the purchasing process and ensure the appropriate approvals, but otherwise let the crowd have at it. Don’t be afraid!

For manufacturers, who represent a smaller and smaller percentage of US GDP and the US economy, advanced sourcing techniques and tools are undeniably relevant and can produce competitive advantage.

But for everyone else, the crowds are coming. And they are empowered to save.