Author Archives: thedoctor

A Primer on Private Equity for CPOs

Private Equity (PE) investment is on the rise in the EU and the US. However, most of us still don’t know very much about what PE is, how it works, or what Procurement’s role is when dealing with a PE firm. That’s why it was great to see this recent article over on CPO Agenda on “The Final Frontier for CPOs” that tried to create more transparency around the practices and importance of Procurement and Supply Chain in this field.

The first thing to note is that PE groups generally make their money by increasing the value of their portfolio companies while retaining part of the generated value by the time they exit the investment in the company at a higher financial valuation. The acquisition of a portfolio company is financed from funds that are raised from private and institutional investors that give the PE group the task of investing the money, managing the portfolio companies and returning an appropriate profit on the investments.

Given the pivotal role that Procurement and Supply Management have in a company’s competitiveness, product innovation and environmental and social footprint, Procurement and Supply Management serve two important tasks in a corporate context from a PE viewpoint:

  • a strong cash flow contribution to meeting debt obligations under the financing terms in the short term
  • a dedicated and measurable effort to swiftly and sustainably improve EBIT and company valuation in the medium term

Remembering that cash is king in a PE buy-out, cash-flow is crucial. Giving Supply Management’s razor-sharp focus on cost reduction and cost control, Supply Management improves cash-flow that is the vital blood of a PE turn-around. It does this by

  • releasing supply-chain related working capital tied up in unnecessary inventories or unfavourable payment terms
  • achieving like-for-like annual company spend reductions of 3% to 6% though the establishment of price competitive with the most suitable suppliers

Plus, Supply Management’s focus on sustainability helps PE since

  • a lasting and recognizable improvement of the procurement and supply chain capabilities can have a considerable positiveeffect on the sale price of the company
  • the benefits of cost engineering, supplier development and supply chain relocation can be harnessed within the typical investment period of four to five years

And Supply Management can benefit from PE and their support for the establishment of procurement platforms they strive to harness spend synergies (mostly in indirect materials) and best practice across the portfolio companies. In other words, done right, PE and Supply Management can be a win-win relationship.

Toto’s Song

No hints this time. Consider it a challenge!

Oh, she likes to put me in compromising positions
I’m supposed to stay there with a smile on my face
Well, they think I’m so cute when she got me in that condition
Well I think it’s a total disgrace
So I said

I fight with Dorothy, but Dorothy always wins
Well, I fight with Dorothy, but Dorothy always wins
Well, I’ve been doing it since I was a young pup
I come out grinnin’
Well, I fight with Dorothy, Dorothy always wins

So I call up the tramp and
I say, “Give me strength for Round 5”
He said, “You don’t need no strength, you need to grow up son.”
I said, “Growing up lead to growing old and then to dying.”
“OO and dying to me don’t sound like all that much fun.”
So I said

I fight with Dorothy, but Dorothy always wins
Well, I fight with Dorothy, but Dorothy always wins
Well, I’ve been doing it since I was a young pup
I come out grinnin’
Well, I fight with Dorothy, Dorothy always wins

I said “Oh no no no”
I said “Oh no no no”
I said “Oh no no no”
I fight with Dorothy, Dorothy always wins

I fight with Dorothy, but Dorothy always wins
Well, I fight with Dorothy, but Dorothy always wins
Well, I’ve been doing it since I was a young pup
I come out grinnin’
Well, I fight with Dorothy, Dorothy always wins!

Good luck!
The LOLCats needed a break today.

Managing Indirect Spend: An In-Depth Review, Part II.2

Our last post continued our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. Specifically, it discussed the chapter on Market Intelligence, which is critical to the success of any sourcing initiative and one of the most important tools in any sourcing professional’s toolkit. In this post, we review the other non-software tools at a sourcing professional’s disposal that were discussed in Bill and Joe’s tome on Managing Indirect Spend.

The major tools at a sourcing professional’s disposal when conducting market research can generally be classified into the following categories:

  • Traditional Industry Publications
    One of the first stops should be one or more traditional industry publications that publish in-depth case studies that include best practices, savings achieved, and new processes or technologies being employed by suppliers and your competition.
  • Indexes
    Indexes such as the CPI (Consumer Price Index), the ISM Manufacturing Report, the ISM Non-Manufacutring Report, and speciality indexes such as the Pulp and Paper Weekly and American Metal Markets can be extremely valuable. Furthermore, for just about any commodity that can be listed, somewhere in the world is an index tracking it. For example, Mintec has over 15,000 indices in its database.
  • Blogs
    Practitioner, Commodity Specific, and General Supply Management blogs can all be helpful. Of course, we agree with Bill and Joe when they indicate that you should start your search in the latter category with SM and SI.
  • Import Records
    This is a great source of competitive intelligence. You can find out who your competitors are using, what types of products they are importing, and in what volumes. Sites like Panjiva, Import Genius, the Datamyne, and PIERS are great places to start for easy access.
  • Search Engines
    It is surprising just how much information is available through Google, especially if one takes the time to learn advanced search capabilities, like restricting to a domain or a set of document types. There are often a considerable number of presentations in PDF and PPT format on the web which already contain the data you need free for the taking. One just has to find them.
  • Social Networks
    It’s amazing the information that some people will let slip on a social network or how frank they will be in a one to one discussion in a group or forum. Don’t forget to use these tools as well – but be careful what you post – it may be archived for eternity.
  • Research Reports
    While most research reports are sponsored and skewed towards the sponsors, the generic market data as well as the capabilities they describe are always useful, and it’s especially useful to see which vendors didn’t make the tragic quadrant or grave analysis. Sometimes they are just as good for your organization’s needs.
  • Group Purchasing Organizations
    GPOs often have oodles of benchmark data. Your organization might need to join, and use them for some non-critical spend, but a judicious use of their master contracts where other members have more volumes can often result in better rates for the organization with very little effort.
  • Electronic Sourcing Tools
    Some SaaS/Cloud providers will often bake-in aggregate market intelligence into the tools they offer. If the organization is already paying for these tools, use them to their full advantage!

Another tool at the organization’s disposal for a successful sourcing project is a spcialized consultancy or Procurement Services Provider (PSP). A PSP with the tools, consulting experience, and skills in the right categories can jump-start an organization’s indirect sourcing efforts and get significant returns months, if not years, earlier. The key is to find the right one that is incentivized to do the job. As such, the organization should probably look for contingency providers that only get paid when hard dollar savings are realized. Providers that get paid based on man-hour effort often have no incentive to get the organizatio the best deal possible as they are paid regardless and providers that get paid based on estimated savings have no incentive to make sure the savings are actually realized. And while contingency providers that get paid on hard dollar savings may ask for a (significantly) higher percentage, it’s better to pay 30% of realized savings and realize 80% of the estimated savings than to pay 15% and only realize 40% of the estimated savings. In the first case, the organization still nets 56% of the savings in its pockets while, in the second case, it only nets 34% of the savings.

However, be sure to follow the best practices outlined by the authors if engaging a (contingency) PSP, or your organization might not get what it bargained for. Specifically, don’t engage an organization that

  • Baits and Switches
    Insist that if the organization provides a resume, that resource actually works on the project.
  • Overstretches
    Make sure the organization has the resources to complete the project – manpower and financial stability.
  • Asks for Double Payments
    If the consultancy gets a commission for (re)selling a certain product or service, they aren’t out to get you the best deal. Period.
  • Asks for Up-Front Payments on Soft-Dollar Savings Claim
    It’s not a savings until the goods are received, invoiced, and paid at the negotiated price without any extra financial gotchas tagged on.
  • Bakes in Hidden Additional Costs
    Read the Fine Print. If you are responsible for travel, software, hardware, and miscellaneous expense costs, your organization could pay more than it saves.
  • Makes Ridiculous Savings Claims
    If a PSP comes in and promises 30% off the board in a category where the base market index has gone up 20% over the last year, that’s probably not a valid claim (unless your organization has the worst sourcing team imaginable).
  • Lacks Analytical or Technical Skills
    Long-Gone are the days when hardball negotiations or reverse auctions were enough. Creativity and deep analysis are often key to uncovering new savings opportunities.
  • Doesn’t Include Audits in their Proposals
    How else will you insure you get the promised savings? Seriously – if the PSP forgets the audit, you forget them.

Finally, it’s important to note that if the organization uses an electronic sourcing tool, it’s doubly important to remember what not to do or the tool will blow up the event faster than you can read this post. Tools don’t replace the necessary human contact and it is vital that the team does not neglect to:

  • insure the right tool has been selected for the event
  • insure the right suppliers are being invited
  • personally invite suppliers
  • follow up on the RFx/Auctin invitation
  • insure the right specifications are included
  • insure the right training is provided to supplier representatives

There are a lot of tools at a Supply Management organization’s disposal for conducting market intelligence and managing indirect spend, but they have to be used wisely.

At this point SI is going to take a short break, but next month it will continue with Part III of it’s review of Managing Indirect Spend and discuss some examples from the field.

Could the U.S. Be A Next Generation Manufacturing Economy?

It’s an interesting question, especially when the U.S. doesn’t have the capacity to support global operations like Apple with their manufacturing needs. There’s only 83 U.S. cities with enough population to support a Foxconn-size manufacturing plant, and for the vast majority of these, only if a significant amount of the population could staff the factory. Even in New York, some estimates state that 7% of the working population would have to work in the same factory to support iPhone production. That’s seven percent! Chances are that not even 0.7% of the population would be qualified without extensive training.

Based on this, despite what some articles might suggest, current generation manufacturing can not return to the US. However, that doesn’t mean that next generation manufacturing, focused primarily on producing specialized high-end technology products for the medical and engineering professions, couldn’t be the backbone of the US economy in the decade ahead.

Consider this recent item in Industry Week on “Arrow Gear — A Case Study in How to Improve the U.S. Economy”. According to the article, Arrow Gear increased its workforce by 35% in the face of the worst recession since the Great Depression by creating products used in high-end, high-priced systems that were being exported. A manufacturer of high precision gears for a wide range of commercial and aerospace applications, it accomplished this feat by investing millions of dollars into its state-of-the-art facility.

This would suggest that a focus on specialty products for the aerospace, health, and (green) energy sectors, in particular, could allow manufacturing to return, in at least a limited extent, to the U.
S. But only if the U.S. takes a lead before another country steps up to the challenge.

Any differing thoughts?

Managing Indirect Spend: An In-Depth Review, Part II.1

In Part I we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last two posts, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. Part I reviewed the process. Here, in Part II, we will review the tools.

The first “tool” that we are going to review is Market Intelligence. Market Intelligence can be defined as a branch of market research, involving collation and analysis of available and relevant information and data on specific market. The information that is gathered varies based on the type of product or service that your organization is purchasing and how critical that product or service is to your overall supply chain and sales of your end product. However, regardless of the product or service being researched, there are critical types of market intelligence that will always need to be collected, including intelligence on global market conditions, benchmarking data, and market pressures. For starters, a buyer needs to understand the forecasting that suppliers use to prepare for competing in a global market. For example, even though a product might be purchased for domestic usage from a domestic supplier, that supplier may be making plans based on forecasting for markets outside of your home country, because if demand for the products grows significantly in foreign markets, or if currency exchange rates shift so that it is more favourable for that supplier to sell internationally rather than domestically, it may cause a shortage off domestic supply, or higher prices.

Bill and Joe are right when they state that world class organizations spend a lot of time constantly (re)evaluating their supplier chains to identify risks and non-competitive pricing. This is how they get ahead. However, it takes a lot of time to collect intelligence, and even more time to separate bad intelligence from good. Once the global market conditions are understood, the next thing the buyers will have to sift through is benchmarking data. This can be difficult in a new, or closed, marketplace if suppliers are overprotective of their data. The best way to get this data is often by working with sales and marketing. It may sound crazy that sales and marketing should be the first stop, but when one considers that all they do is benchmark their competition every day to help with daily sales efforts, they are the perfect guides to get the market intelligence team on their way.

Market pressures are also important. Not only do they impact your organization, but they impact your suppliers’ organizations as well — and these market pressures are critical. If the supplier is cash strapped, in danger of a labor shortage, or located smack-dab in the middle of an uprising-in-the-making, that supplier could be a high risk. And since suppliers are typically an organization’s biggest supply management risk, this is important intel. (Other big risks are impending government regulations, cultural shifts, and natural disasters.)

Of course, the big question on everyone’s mind is how do you succeed with such a hard task? Dedication is key, but so is insuring that each of the components of success are there, including:

  • Right Team
    You need a technical, analytical, and communicative cross-functional team working collaboratively.
  • Sufficient Time
    Make sure everyone on the team has enough time dedicated to market research. It can’t be just another task on an already full plate.
  • Right Metrics
    The right hard metrics, that measure tangible things, and the right soft metrics, that analyze intangibles that can effect the end product or service, need to be defined. Hard metrics may include hard-dollar savings projections, payment term improvements, lead-time improvements, and measurable quality improvements. Soft metrics may include exclusive distribution rights, material changes that will change customer perceptions, better relationships, or process improvements.
  • Right Suppliers
    Researching suppliers that cannot meet organizational needs is a waste of time.
  • Component Costs
    What is driving the costs? Raw materials? Labor? Currency fluctuations? Look for, and track, appropriate indices.
  • Adjacent Technologies
    If a product is too new or there is a relative lack of data, identify adjacent technologies that can provide insights into costs and supplier performance. For example, instead of trying to find iPad component pricing, you might try to find generic tablet component pricing.
  • Right Questions
    Don’t look for a specific part or product, look for all parts or products that could potentially meet organizational needs by describing what it should do instead of naming it.
  • Know When To Stop!
    As with any investment of time, you eventually reach a point of diminishing returns. While you should have enough data to intelligently raise counterarguments with the supplier about price increases and, at a minimum, have a firm understanding of the supplier’s cost models, knowing what drives the costs of a sub-component that is only 5% of the cost might be going to far. Saving 3% on 5% only saves the organization 0.15% in the long run, and will generally not be worth the investment of time to realize that savings.

It’s great advice. Stick around for Part II.2 where we will dive into tools for gathering data and expediting the sourcing process and complete our review of Part II of Managing Indirect Spend.