Monthly Archives: January 2011

Is It All About the P&L?

In a recent editorial piece over on Supply Chain Digest, the Editorial Staff asks if Procurement and Finance [can] Get on the Same Page in Measuring Savings from Supply Management Improvements. The article notes that a major challenge to this effort is the fact that procurement and financial managers are often talking a somewhat different scorebook. While procurement managers focus on savings as cash improvement, finance types tend to focus on profit and loss, and accrue all the while.

However, according to the article, the two don’t have to be fully reconciled for both departments to find common ground. All that is required is a common calculation that both departments can accept. According to the article, this calculation is:

Savings = Secured P&L + Deferred P&L + Mitigated P&L

where

Secured P&L = savings where favourable terms of purchase are acquired through changes in pricing, mix, demand, or quality

Deferred P&L = measure of the benefit delivered to the balance sheet for the current financial period (through capital purchases or pre-payment scenarios, for example)

Mitigated P&L = savings that come from agreements in which favourable terms of purchase are retained (cost avoidance)

Simplified:

Savings = Cost Reduction + Balance Sheet Improvement + Cost Avoidance

This is a good calculation, but I’m not sure balance sheet improvement captures all of the benefit supply management can bring. Is risk reduction (and minimized disruption costs) captured on the balance sheet? Is working capital optimization captured on the balance sheet? (And is procurement credited for reduced finance charges?) Simply put, the value of good Supply Management is:

Value = Cost Reduction + Cost Avoidance + Profit Improvement

where

Profit Improvement = Working Capital Improvement + Risk Mitigation + Capital Acquisitions + Market Share Improvement + ….

VFS Level 2: Increase Current Value

Today’s post continues our exploration of the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Organization.

The next level of VFS, after (most of the) value leakage has been eliminated, is to increase current value. SI is in full agreement here. This should be one of the primary focal points of every Supply Management Organization as it has to be about more than just cost reduction. According to CAPS, the next level of the value curve is obtained by continuing the focus on the four critical components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to take improvements to the next level. At this level of VFS, this means that a company would:

  • Enhance Revenue
    by increasing market share and improving pricing, which could involve a focus on local markets to tailor products to local taste
  • Understanding Real Cost and Reducing TCO
    by modelling what the costs are, and should be, and focussing on the costs that are too high and “attacking them broadly”; this could include finding alternate, cheaper, sources of supply
  • Increasing Productivity of Fixed Assets
    to get bang for the buck, which could include involving suppliers early in custom component design to improve manufacturability and lower costs or the rationalization of specifications to improve operational flexibility
  • Enhancing Corporate Reputation and Increasing Customer and Supplier Loyalty
    by targeting customer needs or working with suppliers to help them improve processes and lower costs

Probably the best example the report gave to increase current value was to follow Comco’s lead. Comco put engineers on site to help suppliers improve processes (using lean and quality management techniques), opened up 3rd party manufacturing research centers (to help its suppliers innovate and reduce costs while improving quality and reliability), and created cross-functional workshop that spanned internal and external organizational boundaries. These actions not only increased current value in the near term, but increased the value the organization could expect in the future, which began the organization’s progression to the next level VFS (which will be discussed in tomorrow’s post).

Again, SI agrees with all of these recommendations, but believes a few key points were missed that are critical to an organization pursuing additional value. Specifically:

  • Revenue Enhancement
    often begins by cutting unprofitable product lines. If a product line is inherently unprofitable, no amount of supply chain optimization can fix things. Supply Management has to do an impartial profit analysis of all of the product lines and determine which are, or could be, the most profitable, which lines should be consolidated, and which lines should be dropped completely.
  • TCO Reduction
    starts with should-cost modelling, continues with should-cost modelling on a component level, and attempts to identify common costs that can be reduced across categories through component rationalization or direct sourcing of raw materials on behalf of a supplier
  • Fixed Asset Utilization
    should also include a cost-benefit analysis of current fixed assets and whether or not they should be maintained or sold
  • Reputational Enhancement
    by focussing on common customer concerns, such as sustainability, and finding ways to embrace them in a cost-effective manner

SI feels that an organization cannot maximize current value unless it starts by understanding the areas where the value is and focussing on those areas, even if that means it has to pull out of certain other areas. And once an organization has maximized current value, it is ready to move on to the next step of VFS, which is the subject of the next post.

Are Canadians Cuckoo for Copper?

Like just about every other commodity these days, Copper, used in everything from construction and cars to telecommunications and power, is surging with a price increase of a good 50% or so in the past year. The outlook for 2011 (AGMetalMiner.com) is that demand will continue to exceed supply and that global stock levels, which have been declining rapidly over the last six months, will continue to do so. Copper is making a comeback, and we are going to feel it in our pocket books.

Since MetalMiner does such a great job of tracking copper prices, along with prices for other metals, and regularly provides us with copper outlooks while doing so, I’m not going to beat the horse up any further but instead focus on a recent story in The Globe and Mail about how “the commodity cycle speeds up” and the impact this is having in The Great White North.

According to the article, the trucks and shovels are rumbling again near the peak of Copper Mountain which is home to the Copper Mountain project, located 270 kilometres east of the Port Metro Vancouver. Copper Mountain was shuttered in the mid-1990s due to low commodity prices and the area has been quiet since then, but now sparks from welders’ torches crackle and fly inside the massive hangar-like processing mill that stands 10 storeys tall. Outside, several 240-tonne, seven-metre-tall trucks — price tag $3.5-million each — bump along at 15 kilometres an hour, hauling away waste rock from the once-prolific pit 3.

In other words, millions of dollars (about $438 Million on reconstruction to be exact) are being spent to revive a mine to mine a commodity that is cyclical in nature and that will, inevitably, fall below the threshold price per pound required to make the mine profitable (and see the mine closed for the fifth time in its history). Which leads one to ask, in the global commodities surge, are we Canadians going cuckoo for copper?

VFS Level 1: Eliminate Value Leakage, Part II

As indicated in yesterday’s post, this week will explore the four levels of Value Focussed Supply (VFS) as put forward in CAPS recent research report on “Linking Supply to Competitive Business Strategies” and the holistic approach put forward by CAPS to get more value out of your Supply Management Association.

According to CAPS, this starts with the elimination of value leakage, and, for the most part, SI is in full agreement (with the disagreements being around where an organization starts plugging the holes). In CAPS’ view, this starts by focussing on four primary components of the balance sheet — revenue, cost, assets, and intangibles — in an effort to find ways to improve them such that the overall corporate position is improved. At this first level of VFS, this means that a company would:

  • Protect Revenue
    by improving quality and stability of supply
  • Reduce Cost
    by reducing unit cost and managing demand
  • Reduce Working Capital Requirements
    by improving working capital management
  • Protect Corporate Reputation
    by taking steps to prevent the media fiascos that would result if
    tainted food or dangerous products were released into the marketplace

and CAPS goes on to give the following examples of:

  • working with key suppliers,
  • looking at alternate fee arrangements,
  • adding better inventory management strategies or early payment discounts, and
  • improving testing and quality inspection process.

These are all valid, and great ways, of eliminating value leakage, but, at least in SI’s view, there are some basic steps a company needs to take before it starts these processes. In particular, SI feels that a company needs to start by:

  • Identifying Key Revenue Streams
    Before revenue can be protected, it has to be identified. Start with a sales analysis to identify the products that are generating the most revenue and then do a cost analysis to determine which of these are, or could be, the most profitable and then focus on these categories as improvements to key revenue streams will be the most effective.
  • Understanding Current Cost, Demand, and Actual Spend
    Before cost can be reduced, it has to be baselined. Do a spend analysis to determine where money is being spent, what the current demand is, and how much the demand is costing you. This will help you identify which categories need the most effort and which suppliers are really key to your success.
  • Understanding and Optimizing Working Capital
    Before working capital requirements can be reduced, they have to be understood. What is the current level of working capital required? Why? And how long is it being tied up for, on average? If capital is moving quickly, inventory optimization might not buy the organization much in terms of working capital reduction, in which case it will have to focus on early payment discounts or baseline cost reduction. But if significant amounts of working capital are tied up in inventory, that is the only thing the organization should focus on until the product is fixed.
  • Identifying the Risks to Corporate Reputation
    If the primary risks aren’t identified, they can’t be protected against. Depending on the type of product being produced, quality might not be the biggest risk to corporate reputation. So a batch of cleaning solution was accidentally watered down by 10%. Is anyone going to notice? Probably not. But if the chemicals used may pose a danger to the environment, then the company has to focus on finding safer alternatives.

SI feels that an organization cannot effectively stop value leakage until it has a good handle on its current situation and has identified where the greatest leakages are. Otherwise, its efforts will likely find only limited success (as the chance of a category having minimal value leakage is just as great as the chance of a category having high value leakage when a category is chosen at random). And even then, there are a few more basic steps a company might have to take but these will be discussed in subsequent posts.

Want Money For Nothing?

Then take a lesson from these faggots* at the CBSC (Canadian Broadcast Standards Council) and censor classic songs from radio airplay because some prick*2 complained about the use of a word which has taken on an additional meaning in modern times.

For those of you who don’t follow global news, I’m referring to the recent decision by the CBSC to censor Dire Straits‘ classic Money for Nothing because one person in the backwoods of Newfoundland (amidst the Rocks and Trees) complained because it used the word “faggot”, which, in England, even today, is still used to refer to a bundle (of twigs, iron, or chopped meat), a junior who performs duties for a senior, and a guy (who may or may not be homosexual) who is just creepy. In the Dire Straits classic, while it is obviously being used in a derogatory manner to describe someone who has reached a station of life that he obviously does not deserve in the eyes of the song’s protagonist, it’s obvious that the contempt from which the comment springs from the song’s protagonist is non-sexual in nature and the definition (of the many that have been applied to the word since its inception almost 800 years ago) is more along the lines of “a guy who is a creep*3“. As such, there is no grounds for complaint and no grounds for censorship.

As far as I’m concerned, this decision is just disgusting. Not only was the song written well before the creation of the CBSC, but it was written before the creation of the CAB (Canadian Association of Broadcasters), which was the precursor organization. In my view, this should make the song ineligible for censorship. And even if it wasn’t, whatever happened to literary license and this thing called free speech?

While we’re at it, should we rewrite Harper Lee’s “To Kill a Mockingbird” which is an American classic that won the Pulitzer Prize in the year of its publication (1960) for its rather realistic portrayal of what life was like in the 1930’s in Alabama small towns? After all, from a modern perspective, the language in that book is much more offensive than Dire Straits’ use of the word “faggot” in Money for Nothing. Consider this line from Chapter 9: “My folks said your daddy was a disgrace an’ that nigger oughta hang from the water-tank!” Said with intent, it might even cross the line into hate speech, but that wasn’t the intent of the author who wanted people to understand what life was like in the 1930s.

In the same light, when Mark Knopfler use the word faggot, he was attempting to describe how hard-working labourers saw music stars at the beginning of the MTV generation. You played a few riffs, sang a few songs, and made a million dollars. They broke their backs and barely paid the bills.

Let’s not forget that a song is a story, and stories are not hate speech. They are artistic forms of communication meant to broaden our understanding of the world around us and the people in it. And if you don’t understand that, then a faggot*4 has more smarts than you do.

Have a nice day.
(And support Halifax’s own Q104 in their protest! F*ck you*5 CBSC. I hope you get one million complaints.)
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* where this blog is using the classic, now obsolete, meaning of the word faggot which was once used to refer to a “man hired into military service simply to fill out the ranks at muster” because I can’t believe they were hired on suitability for the job at this point

*2 where this blog is using the slang definition of the word which means “an obnoxious or contemptible person” because only a truly contemptuous person would complain about the use of a word completely out of context and insist that free speech be censored when no slur was made or intended

*3 note that the slang definition of creep is “an obnoxious person” and not “pervert” as some people seem to think it is these days

*4 in this case, the blog is using the other classic meaning of the word faggot, which is “a bundle of twigs”

*5 and I mean that in the most common utilization of the phrase in modern times