Monthly Archives: December 2014

Procurement Trend 05. Return to Regional and Local Sourcing

Just two very trying anti-trends remain. We’re one post away from fearlessly finishing our formidable burden, but the sour taste in our mouths still remains as we must continue to provide those factually-challenged futurists with counter-examples to the trends of their forerunners who saw this coming a decade ago. (Check the very early SI archives if you don’t believe me. Go ahead. Check. This post will still be here.) We want to abash them for their apathy, but we will leave their hard-earned humiliation for LOLCat, who wants to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these garbage hauling patrons of Quark keep pushing us trends from their flights of fantasy? Besides the fact that some of them obviously spent the best part of last decade hauling garbage, it’s probably because they look around, see the laggard organizations still struggling with the insourcing/outsourcing balance, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are losing hand over fist in their outsourcing arrangements, maybe it’s time to pull them back, especially if

  • energy, and thus transportation, costs are going higher and higher
    and since oil, natural gas, and coal reserves ARE limited, and the dwindling supplies that remain are getting harder to extract, cost have nowhere to go but up, up, and away
  • labour costs are rising in emerging and emergent markets
    and the faster they emerge, the faster labour costs increase
  • nearby markets have low transportation costs and high automation can
    contain labour costs
    since the shorter the distance, the less energy required to cover the distance; plus, intelligent automation decreases the amount of manual labour required to product any product

So what does this mean?

Understand the Total Cost of Outsourcing

Remember, it’s not just landed cost (unit cost and transportation cost), it’s also import/export costs, communication and remote management costs, on-site visits, liability costs, return costs, and other related costs. If many of these costs are rising, then outsourcing is probably not the right idea. If only one or two of these costs are rising then it depends how much, and how fast, and what the alternatives are.

Understand the True Opportunity in Near-sourcing / Insourcing

Near-sourcing will have many of the same costs, but transportation, remote management, and return costs will often be lower. Plus, if you pick/invest in a more advanced plant with newer automation technology, the higher labour costs are probably negated by the lower overhead costs, and the opportunity costs that are often lost waiting for delayed shipments, prototypes to land in your hands for testing, and emergency issue-resolution sessions (across time-zones 8 to 12 hours apart) are often minimized as well. However, a lack of automation can result in significantly higher labour costs, a lack of appropriate trade agreements with respect to the products being purchases can result in higher import or export fees, and energy costs could be higher as well (if renewables don’t enter the equation). The whole cost model has to be evaluated (and compared to the whole cost model associated with outsourcing).

And make a decision based upon true (future) costs

One should never make an insourcing, near-sourcing, or outsourcing decision on today’s costs – make it on expected costs over the next five years. Use the market data that you are collecting for market trend analysis and predictive analytics to figure out what the costs are going to be over the next five years and then choose the optimal production strategy based upon the amortized five-year cost. Consider the hard and soft costs associated with relocating production and/or services, making a change for a very short term gain will not result in any savings being realized. Do the math and make the right choice.

A New Year Will Soon Be Upon Us? Are You Ready for The Coming Changes?

Where Procurement is concerned, the more things change, the more things stay the same is one thing you can count on. Very little changes year-over-year, and that’s probably why the futurists keep pushing the same trends year after year, including those trends old enough to be in many historian’s ancient history books. (We’re not joking. Take globalization, governmental regulations, and supply chain risk for example. These have been issues and trends since “global” trade began between Egypt and Mesopotamia, which occurred over 5,000 years ago. What’s “future” about that?)

Moreover, a best practice, even if its only been adopted by the leading organizations, is not a future trend. It is an ongoing trend if it started a few years ago, but if the leading organizations adopted the practice ten years ago, then it is not even an ongoing trend. It is a past trend that, either due to lack of maturity, resources, or relevance, didn’t cross the chasm. A current, ongoing, trend is something that just in the last few years and is just reaching the point where it will cross the chasm and a future trend is one that has only recently been identified and still in the process of being adopted by the early adopters, which, in Procurement, would be the Hackett Group top 8%.

However, while the changes may be small and few and far between, they do happen, and over time they accumulate and occasionally lead to big breakthroughs which launch new trends. These trends, in the early stages, are the ones you care about. Not trends that were forming ten years ago, because everyone already knows about them, including every competitor you have, and not possible trends ten years out, because, in the interim, the future could diverge significantly from the future required for that trend to materialize. Trends that are in the early stages of formation today. Trends that, if you start preparing for them, put you in the Procurement Leaders camp and keep you there.

Those trends, and only those trends that make you a leader, are the trends that Sourcing Innovation talks about in its latest white-paper on Top Ten Trends for Supply Management Value Generation in 2015 (registration required). Two years ago, SI told you about the top ten things that an organization could do to reign in rapidly rising costs before hyperinflation in key categories put its profitability at risk in its white paper on The top Ten Things to Do in 2013 to Control Costs (registration required). Then, one year ago, SI told you how to mine the goldmine of savings potential an untapped organization is sitting on through the proper application of The Top Ten Technologies for Supply Management Savings Today (registration required).
Now that your organization has its costs are under control and a proper technology infrastructure in place for leading-edge Supply Management, it’s ready to tackle Top Ten Trends for Supply Management Value Generation in 2015 and get processes and programs in place to capitalize on opportunities before the competition.

To find out what the Top Ten Trends for Supply Management Value Generation in 2015 are and what to do about it, download this new Sourcing Innovation white paper, sponsored by BravoSolution, today!

On The First Day of Christmas

My SI gave to me

A glimpse into the eventuality …

Download SI’s latest white papers (registration required) on:

  • Top Ten Trends for Supply Management Value Generation in 2015 sponsored by BravoSolution
  • Optimization, What Comes Next sponsored by Trade Extensions
  • The Procurement Marketplace and The Power of Compliance sponsored by Vinimaya
  • The Benefits of an Integrated Source-to-Settle Platform sponsored by ivalua
  • An End-to-End Invoice Automation Framework sponsored by Nipendo

And start preparing for what might lie in your organizational future!

Optimization, Are You Ready for What Comes Next?

Probably Not. And if you haven’t yet downloaded Sourcing Innovation’s latest Illumination on Optimization, What Comes Next, then you’re definitely not.

As indicated in Sourcing Innovation’s recent post, So You Think You’ve Mastered Strategic Sourcing Decision Optimization, you haven’t even mastered the extent of strategic sourcing decision optimization available to you today. If you’re in the Hackett Group 8%, applying (at least baseline) optimization to the majority of your high-dollar and/or strategic categories, and are even building Billion Dollar sourcing models, then you might have mastered the basics of optimization 2.0. Barely. But optimization 3.0 is on the way.

And because you’re still struggling with the basics of model building, data collection, constraint definition, scenario comparison, and, most importantly, when you should use optimization (always, but not necessarily to make the award decision), you haven’t even had to time to realize that there might be more coming. And there is. Lots more. Just like there was a substantial increase in capability that hit the market starting between 2005 and 2007, about 5 to 7 years after most of the optimization vendors hit the scene circa 2000, we are reaching the point where the next set of rapid advancements in capability are about to hit the market, and those companies that latch on to these advancements first will be in a prime position to quickly advance down the path of supply mastery. They will be years ahead of the average company and decades ahead of the laggards. Decades.

These organizations will not only be the first to take optimization to the next level — and go from T-CAP (Cost of Acquisition and Production/Utilization/Distribution) to true TCO (Total Coat of Ooptimization) on their journey to TVM (Total Value Management) — but the first to merge big data, analysis, and optimization in new and innovative ways that will identify previously undetectable cost avoidance and value generation activities.

So, if you want to be one of this decade’s Supply Management leaders, download Sourcing Innovation’s new white-paper on Optimization, What Comes Next (registration required), sponsored by Trade Extensions, and start preparing for the future of optimization today. It will be worth your while and when you start applying these techniques, you won’t be disappointed.