Monthly Archives: September 2011

How Much Should Sustainability Cost?

A recent post over on the Procurement Leaders blog asked “how much should sustainability cost”. According to the author, he commonly hears two views and suspects a third, specifically that:

  • cost is not the issue as it is really an investment with a potential impact on the top-line that merits the effort and expense
  • it should cost as much as it takes to avoid a scandal

and, most likely in some firms:

  • cost is not the point as it is simply not worth it

Regardless of your view, the author notes that it is worth thinking about what the acceptable cost of sustainable sourcing is, given that, earlier this year, Cargill payed a US 2.2 Million (sustainability) premium to co-operatives on a delivery of cocoa, with about 50% filtering down to cocoa bean farmers in Cote d’Ivoire.

One could argue that it was an investment as the money could be used to further sustainable farming techniques. One could argue that it was paid to avoid a scandal, given the number of articles that have appeared lately on the plight of cocoa farmers along the Ivory Coast, as sometimes you can avoid a scandal simply by not being one of the worst offenders. One might even argue that Cargill might secretly think it is not worth it, and just paid the money to make the whole issue someone else’s problem. (“We paid extra so the co-operatives could be sustainable. It’s their problem if they’re not.”)

I agree that it’s worth thinking about, but I don’t think that any of the answers the author provided, or suggested, are right. I think the cost of sustainability should be:

  • Less, in the mid to long term, than not doing it at all.

If you’re sustainable, you’re using renewable resources. While the cost of a renewable resource may be high at first, as there are up front costs for the new equipment and processes required to produce or harvest it, over time these costs should reduce dramatically. On the flip-side, it’s almost impossible to point to a non-renewable resource where costs are not skyrocketing. So if you’re switching to a truly renewable resource, within a few years, say 5 on the outside, the cost of doing so should be less than sticking with a non-renewable resource. If it’s not, then either the resource isn’t renewable, the harvesting process is inefficient or wasteful, or someone, trying to take advantange of the sustainability frenzy, is charging you a green premium for which there is no justification but greed. (In that case, find another supplier or do it yourself.)

That’s the doctor‘s view. Anyone want to provide a differing one?

Category Management – More than Just a Fad

As per this recent post on “benchmark data points to big advantages of category management” over on SCMR that summarized new data released by APQC, companies that have adopted category management practices – managing product categories separately and customizing them according to specific customer needs – outperform others on a number of key supply chain metrics. Specifically:

  • shorter supplier lead time –
    median lead time of 6 days compared to 28 days
  • faster cycle time –
    median turnaround time of 8 hours compared to 72 hours
  • higher productivity –
    199% more POs processed per FTE
  • fewer FTEs required to order materials and services –
    companies without category management require 2.5 times as many FTEs to order materials and services and have less FTEs to focus on more strategic endeavours

So, if your organization is not already managing on a category basis, maybe it’s time to do so for key categories.

Six Secrets of Successful Freight Tenders

A recent article over on Canadian Transportation and Logistics on “the five secrets of successful freight tenders” had some really great tips for getting the best bang for your buck that makes the article a must read. However, it missed one very important tip, which is probably why it claims that Freight RFPs are analytically challenging. (This used to be true, but it’s not anymore. If it’s still true in your organization, then your organization is stuck in the middle ages and it’s time to at least step up to the industrial age.)

Before we get to the tip it missed, let’s start with the tips it provided because at least one of these is overlooked on many a project.

  • Sell your freight.
    Provide as much information as possible about your freight requirements. For each product, include transport, storage, volume, and frequency requirements. The more accurate and complete the RFx, the better quote the carrier can give you. Without detailed information, carriers will build in a “risk premium” so they don’t end up with “bad freight” and both parties lose.
  • Provide enough time.
    Without enough time to analyze your requirements and consider the fit, you’ll get a rough bid that won’t be the carrier’s best proposal. Remember that, depending on the time of year, it will likely sit on someone’s desk for a week, then in pricing for another week, before someone gets to it in the third week. If detailed analysis is required by the “number cruncher”, it could take a month to get the best bid.
  • Standardize the accessorial program.
    Variety and complexity of programs can make the analysis of bid responses unnecessarily complex, as you will be trying to compare apples to oranges to potatoes. And while maybe you can force fit compare the first two, the third poses quite a challenge. Create one program with one uniform set of charges that applies to all carriers.
  • Fully analyze rate proposals across the board.
    Typically carriers will give you aggressive discounts on major lanes to lure your business, but keep discounts to minor lanes minimal, or non-existent. As a result, you may pay more for freight overall if you end up shipping more on secondary lanes.
  • Benchmark results
    Freight patterns can change, and the net result is that a new freight schedule expected to save you money costs you more in the end. “Shadow rate” your current shipments using at least your last rates (if not your last two rates) to get a feel for what freight profiles give you the best deal overall.

But most importantly:

  • Use a sourcing package that can handle freight optimization and multi-level freight bids.
    A good strategic sourcing decision optimization platform (as provided by Algorhythm, BravoSolution, CombineNet, Emptoris, Iasta, or Trade Extensions) will not only allow for full analysis of the entire freight bid, but allow for the easy import of multi-level freight bids from excel spreadsheets. More specifically, these modern packages allow a carrier to define (inter)national rates by weight, volume, or distance, and then override these by region, and then by lane. This will allow a carrier to quickly define standard bids for low-volume lanes or lanes that they are not interested in and focus in on the lanes that fit their network and that they want to aggressively bid on. A carrier can bid on a 10,000 lane global sourcing project in a couple of hours. This decreases response time and increases bid quality.

Does Your 3PL Have the CCSF Designation?

If you want quick transport by air, maybe it should.

As per this article on “tsa finalizes airfreight screening ruling” in Air Cargo World, the US Transportation Security Administration has executed its interim final rule (IFR) on airfreight security and enabled entities other than airlines to screen cargo transported on passenger planes.

Before the TSAs certified cargo screening program (CSSP) that was introduced in September 2009, only the TSA or airlines were authorized to screen belly-hold cargo. But now that the IFR has been implemented, airfreight entities can now apply to become certified cargo screening facilities, provided they adhere to a stringent chain-of-custody requirement and implement a multi-layered security program that includes appointing security coordinators, strict access controls and vetting of key personnel.

Given that the TSA is aiming to achieve 100-percent cargo screening on all U.S.-bound flights by the end of the year, there’s a good chance that any shipper relying on the TSA or the airline to screen their cargo could experience a backlog delay during the holiday rush season. However, those who use a 3PL with CCSF status will see their cargo clear immediately.

Cost Control – Hwong Style

Those who know Henry, who, before taking on a VP role at Rearden Commerce, held senior roles at Ariba, Provade, Elance, PeopleSoft, and Moai, know that he’s on the ball when it comes to Sourcing and Procurement. Thus, I was very interested to see what his prescription for Cost Control was as he was relatively quiet during his time at Ariba where he took on a more internally focussed role.

But, as per this recent article over on CPO Agenda on “How to Control Costs”, he’s back in the spotlight and eager to share his wisdom with the world.

According to Henry, the secret to cost reduction is not to put more spend under procurement’s control (which is hailed as the holy grail by at least one analyst firm), not to enable enterprise-wide visibility (which is hailed as the holy grail by providers of spend visibility software), and not to put an end to off-contract purchasing (which is hailed as the holy grail by consulting firms a-plenty). While each can reduce costs, the real sercet is to moving towards a more holistic approach to managing the entire lifecycle of a purchase. This is because a platform model that supports the entire procure-to-pay process (and as many categories as possible), gives procurement chiefs the one common driver behind all of the strategies reflected in the survey responses: control.

What a CPO really needs to reduce costs is control over those costs, and, more specifically, control over the processes that drive those costs. Some categories should be purchased centrally, others should be decentralized. Some should be purchased on multi-year contracts. Others should be purchased on a spot-buy every day, week, quarter, or month. Some categories should only be bought on contract. Some should never be bought on contract. The CPO needs the control to ensure that the right policy is followed for every buy. That is the ultimate key to cost control.

In addition, if you really want to control cost, instead of consolidating the supply base, which is the first instinct in 3 out of 5 procurement professionals, you instead expand the supply base. As Henry says, while consolidation presents you with fewer throats to choke, it also increases your exposure to disruption if one of those suppliers fails or has a quality / delivery issue. Plus, when you give users fewer choices, the immediate impact will be an increase in off-contract buying. Thus, if you want to make an impact, you expand the supply base since working with more suppliers can actually increase compliance and interestingly enough reduce costs, as the procurement team has more leverage to work with when negotiating terms.

Finally, if you’re really serious about cost control, you tackle the biggest obstacle of them all — the cultural obstacle. Procurement teams are often not involved in strategic planning decisions and are brought in after major decisions are made and after much of the costs have been locked in. Even having the information that procurement can provide about supplier choices and costs … could play an important role in keeping costs low in the long-run.

It’s a great article that provides great insight into the real drivers of cost — cultural, control, and consternation (about having too many throats to choke). It also provides some great advice on strategies an organization can use to combat wild price changes in dynamic commodities and some insights on where Henry thinks the challenges in Procurement lie. Check it out.