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Monthly Archives: December 2009
The Right Way to Cost Cut
I enjoyed this recent McKinsey Article that noted that companies should start any cost-cutting initiative by thinking through whether they could restructure the business to take advantage of current and projected marketplace trends (for instance, by exiting relatively low-profit or low-growth businesses) or to mitigate threats, such as consolidating competitors. This is much better than the usual practice of cutting equally about everywhere because quick head count reductions often come at a price: missing the opportunities that crises can create to improve business systems or to strengthen parts of an organization selectively.
Also, in some cases, efforts to complete merger integration or to use the new economic situation as a spur to renegotiate supplier or other long-term contracts can yield substantial economies. In the authors’ experience, savings of up to 20 to 35 percent in selling, general, and administrative costs are possible with such measures if companies select the right tactics to support their strategies. The reality is that intelligent cost cutting need not reduce the overall scale of the savings that organizations can achieve. By shifting the focus from organizational structure to current and future strategic needs, it makes for smarter savings, even at companies that have already started down another path.
So don’t be another dumb company. If you have to cut, cut smart.
The Role of Optimization in Strategic Sourcing – Preparing for Optimization
This series discusses the recent report from CAPS Research on “the role of optimization in strategic sourcing”. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.
This chapter starts off by explaining the buyer and supplier data requirements for decision optimization and it does a good job. The five data requirements it lists for a buyer are spot on:
- accurate historical data and projected volumes
this allows you to not only create accurate baselines, but to perform a “sanity” check on the demand forecasts you are given - complete list of requirements
these will form the foundations of your model constraints - minimum quantities and timeframes
these not only specify minimum model awards, but help you determine what suppliers are qualified - complete specifications
these are necessary for the suppliers to submit accurate bids - identification of locations and individual demands
these define the minimum set of bids your suppliers need to submit
Next it goes on to discuss a number of optimization model issues including those of model size, complex sourcing events, small and standard buys, and the optimization sweet spot. The report did a good job on these issues, but three points need to be clarified.
While it is true that many moderately sized problems will still be challenging for a desktop or laptop, moderately sized problems can easily be solved in a matter of minutes (and sometimes even seconds) on average mid-end servers. Furthermore, today’s high-end servers can handle problems that are quite large indeed. And while it may still be the case that no single provider can handle all of your strategic sourcing decision optimization needs, the 80% solution is still a great one — license a solution that gives you 80% coverage and then utilize a second provider for large, custom, high-dollar events where the ROI will dwarf the additional cost.
The report correctly states that while it is quite possible that the software will not find ‘provable’ optimal solutions for the model, the software can nearly always find good solutions that will be ‘near optimal’. However, it does not state that those ‘near optimal’ solutions will be ‘provably’ near optimal, which is always the case with MILP optimization (that is the foundation of the majority of strategic sourcing decision optimization products on the market today). Since MILP solvers start by finding the optimal solution to the relaxed linear model, the distance of each successive solution from the absolute lower bound (which can be increased every time a solution sub-space is fully explored) is always known. So even though there may not be enough time to fully explore the potential solution space and find the provably optimal solution, the solution returned is provably near optimal within a certain tolerance.
Finally, the statement that most e-purchasing suites have an optimization module that can address the large number of bidding opportunities in this area is laughable. There are dozens (and dozens) of providers who offer e-sourcing and / or e-procurement suites (just check the resource site), but only a handful that offer (true) strategic sourcing decision optimization. When it comes to strategic sourcing decision optimization, you’re pretty much limited to Algorhythm, Bravo Solution (Vertical Net), CombineNet, Emptoris, Iasta, or Trade Extensions … only four of these can be considered suites … and only four are self-service. While I expect that we will see more providers with true optimization offerings as part of their suites in the future, until the utilization of strategic sourcing decision optimization becomes mainstream, I don’t expect any new providers will emerge.
Next Part IV: Implementation Issues
“Surprise” Tariff Increase on Solar Panels
Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)
The October 1 New York Times has an interesting article on a tariff increase on solar panels. While the panels came from China, that’s not the interesting part of the story. The interesting part is that CBP (The US Customs and Border Protection department — successor to the US Customs Service) announced the tariff increase eight months ago and nearly the entire solar panel industry missed it.
To summarize, one US company asked CBP for a classification ruling that would set duty rates for the solar panels they were importing. The company proposed using a semiconductor classification, as the rest of the industry was doing. CBP replied that solar panels were more complex and should be classified as DC generators. CBP published this ruling through normal channels and almost nobody noticed. Here are a few key paragraphs in the article:
“It is somewhat unusual for an industry to take as long as eight months to become aware of a customs ruling that affects it,” said Mel Schwechter, a partner at Dewey & Leboeuf in Washington and a former president of the Customs and International Trade Bar Association.
Customs decisions, even for a single importer, are made public on the agency’s Web site and on commercial Web sites, said Mr. Schwechter, who is not advising any of the participants in the dispute.
Mr. Resch said the growing industry lacked the resources to constantly track tax and regulatory decisions.
Duties will be doubled if customs officials determine that companies have been negligent in not paying them earlier.
Importers might also be liable for duties on all solar panels brought into the United States in the five years before the ruling if customs officials decide that the companies were guilty of “material misstatement or omission” for failing to notice sooner that solar panels had evolved to the point that they no longer met duty-free rules.
The duty on semiconductor devices is zero. The Times said the duties on DC generators is 3.5%. I think it’s 2.5% but my opinion is should not be relied upon for reasons I’ll explain below.
So what went wrong here? Mr. Resch is right, the industry “lacked the resources to constantly track tax and regulatory decisions.” What does that take? In the US, it takes a relationship with a very professional customs brokerage firm who would be under retainer to keep a client informed of regulatory decisions impacting the products a company imports. This is getting more difficult due to structural shifts in the customs brokerage industry. There used to be large, stand alone customs brokerage companies. Many importing companies had different companies doing their freight forwarding and customs brokerage. However, about five years ago two major customs brokers were purchased by UPS and Fed Ex respectively. The remaining customs brokers are much smaller companies. Importers can and should change freight forwarders if there are performance issues, but customs brokers are harder to change. They need detailed knowledge of their clients’ business and the learning curve can be steep.
Why shouldn’t you rely on my opinion on duties on generators? CBP can increase penalties for non-compliance if they determine an importer didn’t use “reasonable care” in their customs decisions. They look for an audit trail back to either a licensed customs broker or a customs attorney. I’m neither, so taking my advice wouldn’t meet the “reasonable care” test. I still think I’m right though.
Dick Locke, Global Procurement Group and Global Supply Training.
There are Analysts and There are Analyst Firms … Guess Which One You Really Need to Understand?
Recently Dan Gilmore, Editor of Supply Chain Digest, published a “first thoughts” piece on Understanding Supply Chain Analysts. In it he made a number of valid points, including:
- Analysts can provide useful information and insight
- Analyst research / opinions can have a significant impact on how a company views specific technology vendors and options.
- Technology vendors often change product roadmaps and messaging to match what they think the analysts want to hear.
- Some analysts are primarily vendor focussed on their client base while others are “consumer” focussed and others still sit somewhere in the middle.
- Most analysts today will not write any “negative” research/opinions on a specific vendor for fear of the fire and brimstone it would bring.
The last point is both scary and true. Printed negative opinions in the analyst community are going extinct. However, negative opinions are still strong in many of the top analysts in our space. So what gives?
What gives is the analyst firm. Today, most of the top analyst firms frown seriously on quoting or printing any negative opinions and, in some case, have steadfast policies banning the public iteration of a negative opinion about any past, present, or potential client in fear of the fire and brimstone wrath that could result in the termination of funds or, where some of the more successful analyst firms are concerned, a frivolous lawsuit against their flush bank account.
Before you engage an analyst you need to understand, at a minimum, the following about their firm:
- Revenue Model: Vendor-Driven, Enterprise Buyer Driven, Consumer Driven, or some combination thereof
- Management Team: Primarily Former Analysts or MBAs
- Ownership: Management &/| Employees, Private Equity, or Public Equity
- Clients: Who are they?
Why? Each of these will have an impact on organizational policy and, as such, on the analyst focus and their freedom of speech. For example:
- Vendor Driven Revenue Model
The analyst firm will likely be very careful in what it allows to be conveyed about any of its clients. - MBA Management Team
The analyst firm will likely be more focussed on profitability metrics than on quality research. - Private Equity Ownership
The bottom line will likely be the most important success metric the analyst firm is judged against. - Vendor X is a Client
Any “research” produced will likely echo the importance of whatever the vendor says in its marketing and positioning, regardless of what is said.
In comparison:
- Consumer Driven
Since none of the vendors being reviewed are clients, and since the analyst firm’s revenue will likely be linked to the credibility of their research, the analyst firm will be less likely to censor itself. - Former Analyst Management Team
The analyst firm will be more focussed on quality research than on profitability metrics. - Employee Owned
The analyst firm does not have to meet external success metrics and can set their own agenda. - Vendor Y is not a Client
The analyst firm does not have to worry about subscription renewal fees.
Essentially, if you understand the firm, you understand the level of trust can you put into an analyst report and, more importantly, the level of openness you can expect if you engage the analyst in a one-on-one conversation. In the second case, a good analyst will likely give you the full monty.