Monthly Archives: January 2016

Beyond Sourcing Optimization: The Best Bundle is Only the Beginning Part II

As per our last post we recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.

But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. As noted in our last post where we briefly discussed inventory optimization, production optimization, and demand optimization — three areas that can hide considerable cost savings when properly analyzed — there are a number of areas in an organization where optimization can identify considerable value. Today we will discuss three more areas.

Service (Level) Optimization

The goal of service level optimization is to find the right balance between customer satisfaction and service cost to maximize profitability while minimizing customer dissatisfaction. While everyone would like a robust high-quality product that lasts until they are done with it, that’s not always feasible. The very nature of many product lines — electronics, automotive, plastic-based CPG is that the products will break down with regular use and/or regular exposure to the elements. Better materials, better manufacturing, and better care will lengthen lifespans, but computing equipment, cars, and plastic boxes don’t last forever. And if the intended lifespan is 3 years, it’s not cost effective to build a product expected to last 13 years. However, the nature of things is that if you build a product expected to last 3 years, some units will breakdown and need to be replaced before the 3 year mark is up (and some will last longer). So what level of warranty do you need to offer, what level of service (in terms of repair / replacement window), how much will it cost, and how much will the market bear. Finding the right base / extended offerings and price points is key to maximizing both consumer demand and customer satisfaction.

Asset Optimization

Big organizations have a lot of assets, often assets they often don’t know that they have. For example, unused compute power in the data centre, unused production time at the factory, and unused equipment in the yard. This last category can be a huge burden to an organization that is paying a lease or amortized monthly payment on a 10-year plan for equipment that is only being used part of the time. (That’s why renting by the job or renting out might be a better solution.) And if an organization is continually renting the same equipment for multiple projects, it might make sense to buy and share the equipment between projects, even if it has to be transported between locations. Asset optimization can save an organization a lot of money and can often, when done properly, considerably increase working capital. This brings us to:

Working Capital Optimization

Optimizing the balance between assets and liabilities, working capital ensures that a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses without creating a crushing debt load or jeopardizing long term profitability. Working capital optimization is tricky as it involves balancing with DPO (days payable outstanding) with DSO (days sales outstanding), early payment discounts (on the inbound and outbound supply chain), supply chain and invoice financing, short and long term investment opportunities, and short-term gains vs. long term cost reductions. It’s not easy, and, like all of the other examples of optimization covered in this brief two-part series, often requires sophisticated optimization.

These are just a few of the examples where optimization can yield significant benefits beyond sourcing and where Sourcing can bring additional savings and value to the enterprise since it will be able to collect a lot of the data and intelligence that is required to build, and solve, the sophisticated models required.

In future posts we will discuss these types of optimization in depth as well as the new breed of providers tackling these types of supply chain optimization. Stay tuned.

Marketing Mayhem Got You Down? Maybe It’s Time to Master the Marketing Way.

In many organizations, Marketing is still one of those sacred cow categories that Procurement has (very) little influence over but yet often accounts for (up to) 20% of spend. It’s also one of those categories that, like packaging, logistics, and MRO, straddles the boundary between direct and indirect (which are, as you know, two categorizations that SI despises because it’s strategy and complexity that matters). And, even though it (should) have a substantial impact on sales and revenue, the reality is that it has a much greater effect on the bottom line as an average marketing organization is overspending in the double digit percentages on a significant percentage of its spend — especially when the spend is on consumables (like print) or commodity services (like website design, social media marketing, or production overhead costs).

But mastering the marketing way is not easy — marketers, like financiers, have their own language, their own modus operandi, and their own tastes and in each aspect are often quite different than Procurement, who they tend to distrust because they tend to firmly believe you have to spend (lots of) money to make money, so Procurement’s agenda of reducing spend runs counter to everything they believe in. And, conversely, Marketing’s traditional focus of spending their entire budget to raise brand profile and sales (even if not absolutely necessary) runs counter to everything Procurement believes in.

But this is just the tip of the marketing mayhem that Procurement has to get a grip on if it wants to help the organization get a grip on marketing spend. In order to even get through the door and get a foot in the marketing department, Procurement not only has to appear non-threatening and not focussed entirely on spend reduction, but has to talk the talk (and master the marketing lingo), walk the walk (and dress for marketing success), and live the life (to the point that they are comfortable with the marketing way).

But this just get’s Procurement in the room. In order to get Marketing to listen, the “savings” message has to be buried, and the focus has to be on what marketing cares about — helping them get the best creative talent and ensuring they have as much money as possible to do this. (In other words, it’s about helping Marketing achieve “cost control” on non-value added products, like print, and services, like commodity social media campaign management, web design, or production house services.) The best value marketing can bring is a campaign that increases brand value (perception), and this takes the best talent, who want the top dollar. Procurement has to be able to convince Marketing that they can help Marketing do this by better cost control and better processes.

Then, once Procurement get’s the core messaging right, they have to bring the right process messaging. Some Marketing departments are still in fax, email, and spreadsheet hell when it comes to tenders, bids, and negotiations. They don’t have good supporting platforms, processes, or tender management support. This is the value — and power — that Procurement can bring. But the messaging has to go beyond the canned e-Negotiation messaging that Procurement was sold on. Marketing projects are not typical products or services and Procurement has to understand this to get Marekting’s support.

Procurement has to understand Agency (Lifecycle) Management, the importance of scope of work, the nature of agency search consultants, market intelligence (for marketing), and campaign management, among other critical marketing terms and techniques. When you put it all together, the education and understanding needed to even approach the sacred cow marketing spend is quite considerable indeed, and the education available to you quite limited. Until now.

Over on Spend Matters Plus, the first three parts of a new six-part series on How to Get Marketing Spend Under Management by the sourcing doctor and the spend anarchist are up for your educational pleasure. This in-depth series, which will take you through mastering the marketing way, understanding the value drivers, engaging executive support, bringing a message of structure and support in agency management, going deep on tender support, and agency intelligence, is just what you need to understand marketing and finally get marketing spend under control in 2016.

We hope that this ground-breaking first-of-its-kind series is just what you need to take your organization’s spend management to the next level. For those of you wanting to dive in, here are links to the first three posts:

  • Master the Marketing Way
  • Understand the Value Drivers
  • Engage Executive Support

Enjoy!

Beyond Sourcing Optimization: The Best Bundle is Only the Beginning Part I

We recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.

But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. In this post we’ll outline some of the best opportunities, a few of which have been covered before, and in future posts over the next year we will dive deeper as we introduce you to some of the companies exploring the use of optimization in these areas to bring your operations the same level of savings that your SSDO vendors are bringing the Sourcing and Procurement organization.

Inventory Optimization

Inventory optimization can be defined as the act of balancing supply and demand uncertainty to meet a desired services level at a minimum level of investment. But this is easier said then done. Not only do you have to consider the myriad of carrying costs that need to be balanced — warehouse rental costs, labour costs, and depreciation costs — but also take into account the costs associated with stock outs, alternate distribution costs if inventory is improperly distributed, and lead time costs, and try to balance them all.

Production Optimization

Optimizing inventory is a good start when it comes to reducing overhead costs, as inventory carrying costs can be as high as 25% by some estimates. However, production costs can also be unnecessarily high if production is not optimized. Production line down time is costly, and a production line goes down every time it is switched up to produce a new product (or a new variation). Thus, it’s not always best to plan production by order volume, but by total volume for a period, optimizing production runs to maximize throughput (and worker time), minimize downtime, and, most of all, minimize switching times. Especially if order volumes vary and part of the year would otherwise require overtime to meet demand.

Demand Optimization

The counterpart to production optimization is demand optimization. Not only does it cost the organization hard dollars to carry inventory unnecessarily or use poor production plans, but it also costs the organization hard dollars to product unprofitable product lines or cater to unprofitable customers. For each product line there is a production cost, a marketing cost to increase demand, a cost of goods solds (COGS), and an opportunity cost from not producing a potentially more profitable product line. Demand optimization is optimizing what product lines to produce, how much to invest to shape demand, and when to produce those product lines. It optimizes organizational profit by focussing on profitable product lines and marketing activities versus marginally profitable or unprofitable activities.

And these are only a few categories where optimization can increase performance, and profit. In part II, we will tackle three more areas. Stay tuned.

SI’s Prediction for 2016 – It Will Only Get Hotter!

Last year, SI, which welcomed you to hell in the year of damnation (with 100 Damnations Down to date in the dirty dozen categories), avoided predictions because, as it clearly explained in its 2014 Series on The “Future” of Procurement and the follow up series which did a “Future” Trends Expose, most predictions are trash, with most futurists recycling the same old garbage year-after-year, and even though we are only four days into this year, it appears this year will be no exception.

the doctor is already seeing a number of 2016 posts about how this is the year we replace “negotiate” with “collaborate” (which the thought leaders have been saying since strategic sourcing decision optimization started becoming common in the leading Sourcing organizations, also known as the Hackett Group top 8%), that analytics will take off (which is the same speech we heard 15 years ago when Business Objects and Cognos were the names in analytics), that the skills gap will finally be addressed (which reminds the doctor of conversations he was having nine years ago), and so on. It looks like the amount of future sh!t that is going to be dumped upon you this year is greater than the truckload Biff Tannen had dumped upon his head in the original Back to the Future movie, way back in 1985. (A reference that is very appropriate because every year at this time it seems we get taken back to the future.)

The only prediction SI has ever really liked is last year’s prediction by Mr. Smith who “predicted all predictions will be wrong” on Spend Matters, because that’s one of only two predictions you can count on for this year. The other SI will give you now so you can get the prediction post itch out of your system and get back to work:

It Will Only Get Hotter!
You’re still in hell. Budgets are still too tight. Your platforms are still too out of date. The training budget is still zilch. Risk are still increasing. Commodity prices are still going through the roof. The emerging market, which is where the population growth is happening (especially now that China’s one child policy has been eased and a couple can have two children if either is an only child and the middle class in India is increasing), is gobbling up commodities and energy faster and faster (as even a small growth rate in the two countries that account for over one third of the world’s population is substantial) which is not only causing rampant price increases but shortages. Product lifespans are continuing to decrease and consumer preferences are changing faster than you can predict. The procurement equivalent of the second law of thermodynamics is in full effect and the result is chaos.

Last year, you might have been in the frying pan. This year, no matter what happens, you will be in the fire trying to dance between the flames. You have been warned!