Monthly Archives: August 2010

A.T. Kearney Confirms Huge Savings Potential in Indirect

A.T. Kearney recently released the results of their “Indirect Procurement Study” (IPS) that analyzed indirect procurement across 94 multinational companies with a combined indirect spend of $134 Billion which suggests that indirect procurement categories like IT, marketing and advertising, facilities management, MRO, Logistics and professional services have become increasingly important to Chief Procurement Officers. This is good news considering the huge savings opportunity it represents as indirect spending accounts for 60% of third-party spend in non-manufacturing companies, more than 90% in the financial services industry, and sometimes 50% of spend in manufacturing organizations.

Like any other A.T. Kearney or Big Consulting study, it’s jam-packed with lots of results, statistics, findings, and conclusions, but there’s one finding in particular, which was picked up by this recent article in logistics management, that really gets the message across:

The most successful indirect procurement organizational model was a central-led organization with collaboration across business units. Users of this model achieved savings greater than 10% over the last two years in 47% of categories.

In other words, if you’re best in class, you can expect to save at least 10% on at least 25% of your spend, or 2.5% of your total spend. (Worst case, you’re manufacturing with only 50% indirect spend. You save 10% on half of those categories, which is 25% of all of your categories.) If you’re spending at least 100M annually, that’s at least 2.5M, and that’s nothing to scoff at! And if you’re using a real data analysis tool, it won’t take you long to find it either!

For some great tips on where to look for indirect savings, if you haven’t already, download the recent Sourcing Innovation Illumination on Strategic Spend Visibility. It’s definitely worth the read.

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A Hitchhiker’s Guide to e-Procurement: Payments

Mostly Harmless, Part XIV

Previous Post 

Reconciliation challenges and best practices.

A payment is the transfer of wealth from one party to another. The payment is usually cash or cash equivalent, such as cheque, money order, or electronic funds transfer. The payment must be recorded, tracked, reported and assigned to an invoice. Despite all of the focus on e-Payment (P2P, EIPP, etc.), it’s actually the simplest part of the e-Procurement process. The AP clerk simply sends a cheque or instructs a payment to be made, and then records the debit. All of the complexity comes before (which should now be apparent after reading this far in this series) and after (which will become clear). Nevertheless, there are still some challenges to be addressed, some best practices to streamline processes, and some benefits to getting it right.

Common Challenges

  • Paying on Time

    For even a moderately sized company with hundreds of payments to process every week, it can be hard to keep track of which payments are due and which payments are approved. While the organization might choose to make some payments late, others may need to be made on time to avoid penalties.

  • Automating Payments

    If a contract specifies a regular, recurring payment, if a payment can be automatically approved, or if the organization has chosen to pay off a debt in an instalment plan, the payments should be automated.

Best Practices

  • Rules-Based Automation

    The system should allow one time, limited-time recurring, and regular (repeating) payments to be automatically queued according to whatever rules the organization has in place.

  • e-Payment / Accounting System Integration

    e-Payments generally need to be made through bank systems, or through accounting systems that are integrated with, and authorized to use, bank systems. As a result, the system should be capable of being integrated with these systems. This integration can be as easy as exporting a (differential/update) XML file at an hourly interval (with information to be propagated to the accounting system) and importing a (differential/update) XML file at an hourly interval (with information to be propagated [back] to the e-Procurement system).

Potential Benefits

  • Cost Reduction

    Without good system support, payment processing is a very time consuming, and somewhat error prone, task. A good system that automates payment processing saves time (and processing costs), prevents late payments (that generate penalties), and reduces the chance of human error (that can lead to more penalties or costly recovery initiatives).

  • Increased Savings

    Automating payments not only reduces costs, which contributes to savings, but allows payments to be scheduled in a manner that allows for early payment discounts, which increases the savings available to the organization.

Once the payments are made, it is time to try and recover the tax payments that can be refunded to the organization, which is the subject of the next post.

Next Post: Tax Reclamation, Part I

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A Great Argument for Carbon Taxes (and Credits)

A recent article in Knowledge @ Wharton Universia on “phishing, bribery, and falsification: combating the complexities of carbon fraud” provides a great argument on why cap and trade should be abandoned in favour of straight carbon taxes (and credits if the goal is to encourage corporations to be as efficient with carbon emissions as possible). According to the article, carbon trading systems, especially when coupled with lax Internet security and third party verification, pose a great opportunity for crooks who want to defraud honest companies out of millions of dollars.

The first example the article gave was of a group of rouge traders who, earlier this year, stole as much as $4 Million by posing as regulators, setting up a fake, but official-looking website, and using it to obtain carbon trading account information from companies and traders who thought they were complying with government requests. The scheme forced the German Emissions Trade Authority to suspend trading, but not before 250,000 permits had been stolen.

The second example was that of Carbon Harvesting Corp who’s director has been arrested and charged in connection in an alleged scheme to pay $2.5 Million to “rent” a fifth of Liberia’s forests and profit by selling the credits that could be obtained from the carbon absorbing trees.

All in all, Europol estimated that tax fraud associated with carbon trading reached 6.5 Billion over 18 months, and in some countries, up to 90% of trading volume resulted from fraudulent activities. A recent report on “Ten Ways to Game the Carbon Market” identified 10 scams common to carbon trading … and the list was not necessarily all-inclusive.

But if there’s no trading, there’s no opportunity for trading fraud. And there’s no need for trading if governments simply levy a tax on every tonne of carbon emitted. Furthermore, if the goal is to compensate companies that are being extra efficient about carbon emission, there can also be carbon credits where companies that emit below a floor can get tax credits. In fact, it only takes a simple algebraic formula to capture taxes and credits in a joint system: (tons emitted - tons allowed) * tax per ton. For example, if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 2,000 tons, then the company would pay (2,000-1,000)*10 = 10,000. And if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 500 tons, then the company would get a credit of (500-1,000)*10 = 5,000 on its tax return. Simple.

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Should the US Insource It’s Nutrition and Health Care from India?

I loathe saying it, but I think the US should import India’s bright entrepreneurs and their organizations to manage it’s healthcare and nutritional programs.

In the US, 31% (or 1 out of 3) of people are obese (which is defined as 30 pounds or more above a healthy weight range) and 65% of people (or 2 out of 3) are either overweight (at least 10 pounds above a healthy weight range) or obese. Current projections put obesity at 40% (or 2 out of 5) within 5 years. And these statistics are almost as bad for children as they are for adults! (And you can’t blame TV and lack of physical activity. Nutrition and diet has a greater effect on weight than exercise, which has a greater effect on overall health and stamina. The problem is that the average American consumes too much sugar. The Bitter Truth is that variants of bad sugar are in everything these days.)

Part of the problem is the US school lunch program, and its insufficient funding, which leads to purchases of cheaper, junk foods (including processed chicken nuggets, etc.) in place of more expensive, healthier foods. And while the Improving Nutrition for America’s Children Act seems like a good start, you just know that most of the additional funding will get eaten up in administration costs. (And even if this doesn’t happen, I have to agree with Gordon Jenkins that the funding being allocated just isn’t enough.)

Then there’s the state of healthcare in the US, which is dismal if you don’t have pricey private insurance, and still over priced if you do. In fact, despite the fact that the USA leads in GDP, and should lead in healthcare innovation, the World Health Organization has it’s health care system ranked at 37! To put this in perspective, Costa Rica is 36, Saudi Arabia is 26, and Oman is 8 — which are not countries your average American would think of as ranking high in health care.

In comparison, India has the 1,000 bed Narayana Hrudayalaya Hospital with a team of 40+ cardiologists who perform about 600 operations a week for an average charge of $2,000 — at a success rate that rivals the best American hospitals. By employing Henry Ford’s management principles to create a combination of economies of scale and specialization, Devi Shetty has developed a system that can drastically reduce the cost of surgery. If the principles were applied to other areas of medicine, imagine the efficiencies, cost savings, and success rates that could be achieved. (After all, now that hospitals are starting to use before-and-after surgical checklists, success rates are soaring and infection rates plummeting.)

And while that’s impressive, what Akshaya Patra is managing to do is even more stunning! For a mere $28 each, they are managing to provide over 1.2 Million children in school with a healthy lunch (which might be the only complete meal they get that day) every day for the entire school year. By leveraging appropriate technology in cooking and delivery, local markets, and designing for scalability, the public/private/NGO partnership is achieving economies of scale that have not been achieved before — and proving that a healthy student is a successful student. The increased quality of the lunches provided have led to increased enrolment, better health, and improved performance (that is 13.8% better, on average, for boys and 34.2% better, on average, for girls).

Compared to India’s success, the US looks like a third world country. Maybe the US should be insourcing from India.

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Game On!

If you’ve been Watching the Guild (Tuesdays on MSN and Bing and Zune Marketplace), you’ll know that last week they released their season 4 Music Video Game On. (And if you haven’t been, maybe you should be!  After all, it takes organization and leadership to succeed in these games, just like it takes organization and leadership to succeed in supply chains.) Even if you don’t like videos that are based on a Web TV show that is based on a group of misfit MMMORGP players, the video, which can be described as what happens when virtual worlds and Bollywood collide, is a very impressive production considering the no-budget constraints imposed on Web TV today.

It’s a great follow up to last year’s (Do You Wanna Date My) Avatar.

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