Author Archives: thedoctor

Risk 2011: Technology

In our last post, we indicated that the World Economic Forum had recently released its 6th annual Global Risks report, it’s 2011 edition. This report was filled with risk, thirty-seven types of risk divided into five categories to be precise. Today, we are going to discuss what Sourcing Innovation thinks are the top three technology risks from a Supply Management perspective.

03: Threats from New Technology

Your business depends on its profit margins. Its profit margins depend on keeping revenues up and costs down. Revenue often depends on having the best product for your target customers at the best price point. Keeping costs down usually depends on a lean, streamlined process which, in turn, often depends on leading-edge technology to keep it running as efficiently as possible.

If your competitor identifies, latches onto, and implements a new technology before you do, then your competitor may be able to lower its production and operating costs well below your production and operating costs. If this happens, it will be able to lower its price point, and increase its revenue at the expense of yours. Then your organization will face declining revenues with higher costs. Profits will quickly disappear. Given the rapid pace of progress in many technology verticals, this could happen overnight if your organization doesn’t at least keep up, if not stay ahead of, the curve.

02: Online Data and Information Security

Every week we hear about another data breach at another retailer. What we don’t often hear about, because consumers aren’t directly affected, is yet another network intrusion at a Global 3000. While the average hacker might want your credit card, the average hacker employed by organizations that resort to corporate espionage wants your data – and your Supply Management related data in particular. What are you making? What are the specifications? Where? With who? When are you shipping? From Where? With what carrier? If any of this data finds its way to your competition before you’re ready to release a new product, the losses could be crippling. What if your competitor is able to use your plans to jump-start their development of a better version and beat you to market? What if thieves intercept your critical shipments and sell your product on the black market? While a consumer’s financial solvency depends on her credit card information being kept secure, your organization’s financial solvency often depends on your Supply Management data being kept secure.

01: Critical Information Infrastructure Breakdown

Let’s face it, it’s impossible to manage a global supply chain without modern supply management systems and the information infrastructure that supports them. What happens if your primary data centre gets taken out? What happens if your headquarters loses power for 48 hours? What happens if the land lines fail and the one satellite that carries cellular signals for your (remote) location stops responding? The minute your internet goes down, your business stops. Literally. And since your information infrastructure could breakdown as the result of a (power) grid overload, a data centre failure, an environmental disaster, or a terrorist action, all of which can not be predicted (or prevented in many situations), this is a significant risk that requires risk mitigation plans be in place and ready to go at a moment’s notice.

Risk, Risk, Risk: 2011 Did Not Improve Matters Any

The World Economic Forum recently released it’s 6th Global Risks report, 2011 edition, and it’s filled with economic, environmental, societal, geopolitical, and technological risks that are plaguing global supply chains across the globe. Some of these have not changed since SI first reviewed the 2nd edition back in 2007, and some are new. However, they all have the potential to bring your supply chain to a grinding halt. In this series, we will review each category of risk, focus on a few risks of immediate relevance and discuss how they could impact an average supply chain.

At a high level, the risks identified were:

Environmental

  • Air Pollution
  • Biodiversity Loss
  • Climate Change
  • Earthquakes & Volcanic Eruptions
  • Flooding
  • Ocean Governance
  • Storms & Cyclones
 Technological

  • Critical Information Infrastructure Breakdown
  • Online Data and Information Security
  • Threats from New Technology
 Societal

  • Chronic Disease
  • Demographic Challenges
  • Economic Disparity
  • Food Security
  • Infectious Diseases
  • Migration
  • Water Security
Economic

  • Asset Price Collapse
  • Extreme Commodity Price Volatility
  • Extreme Consumer Price Volatility
  • Extreme Energy Price Volatility
  • Fiscal Crisis
  • Global Imbalances & Currency Volatility
  • Infrastructure Fragility
  • Liquidity / Credit Crunch
  • Regulatory Failures
  • Retrenchment from Globalization
  • Slowing Chinese Economy (<6%)
 Geopolitical

  • Corruption
  • Fragile States
  • Geopolitical Conflict
  • Global Governance Failures
  • Illicit Trade
  • Organized Crime
  • Space Security
  • Terrorism
  • Weapons of Mass Destruction

That’s a lot of risk to consider, spread across five categories and thirty-seven risk types, each of which could manifest in dozens, or hundreds, of ways across your global supply chain. In the next five posts we’ll discuss what SI thinks are the top risks in each category and why.

Public Sector Reverse Auctions: 8.9 Billion in Savings in US Federal Government Spending Alone!

As the astute reader may have guessed from our last post, the doctor is not a big fan of reverse auctions in the private sector. In many cases, he cringes at their mention — because the savings are typically one-time, short-lived, and come with a hefty virtual price tag that is sometimes greater than the initial savings (which doesn’t materialize for months or years to come).

But reverse auctions have their niche, and that niche is the public sector. The unique (and typically illogical) spending constraints often make reverse auctions a perfect fit, and where the public sector is concerned, anything that can reign in rampant government spending gets a go ahead in the doctor‘s book. As per our last post on reverse auctions where we noted that old is new, but one-time is still just one-time, while the relative lack of spending constraints in the private sector will result in the realization of most (if not all) of the benefits of reverse auctions in the initial use, the public sector will realize the most significant competition and price benefits again and again. (It’s sad that this is the case, but given how slow policy and process changes in government agencies, we must work with what we have.)

And in the public sector, where the utter lack of anything resembling best practice supply management process and technology is often the norm, these benefits, at least initially, can be almost as significant as the benefits decision optimization brings leading edge private companies. As per Wyld’s results, which were based on an in-depth examination of reverse auctioning at the Department of State:

  • there is a proven savings factor of 11.9%
    (at the Department of State, which reverse auctioned over 613 M of spend over 4 years)
  • which could be applied to 75 Billion of annual spending that is appropriate for auction-based procurements
  • and this yields an annual expected savings of 8.9 Billion

Furthermore, this savings potential is fairly consistent in the implementation of reverse auctions around the globe. South Korea expects to save about 10.5% annually. The UK Office of Government Commerce sees similar savings opportunities on their addressable spend. And a recent study from researchers affiliated with the United Nations that meta-analyzed reverse auctions across four different government entities in the US and Europe reported an average savings rate of 12.1%.

And these savings will materialize again and again. Public sector organizations will continue to see:

  • downward prices
    Not only is the public sector guaranteed demand, but it is demand that is typically guaranteed to increase over time in most categories and markets. As a result, supplier organizations will continually vie to profitably produce those products cheaper in an effort to win those lucrative government contracts which they know will be coming around again.
  • real-time market pricing
    Pricing will always be up to date each time the event is run.
  • time savings
    Since potential suppliers come and go more frequently, and since contracts continually change, the time savings are significant as much of the work required to implement the changes can be automated.
  • increased number of suppliers
    Every year, new suppliers will throw their hat into the ring for government contracts as they reach a size where they feel they can effectively compete.
  • sustainable cost savings
    Since government organizations must continually put categories out to bid, since past performance typically can’t be used to tip the scales one way or another, and since long term contracts can’t be cut on future offers, all savings must be measured against average market price. Since an auction will generate the best market price, the public sector government organization will save every time.

In short, if your organization is a public sector procurement organization, and it does not have an e-Auction platform, then your organization should get one today. The cost is minimal compared to the savings, accountability, and accolades that will materialize upon its proper utilization.

Reverse Auctions: Old Is New, But One-Time is Still Just One-Time!

The IBM Center for The Business of Government’s recent report by David C. Wyld (the Director of the Strategic e-Commerce/e-Government Initiative at Southeastern Louisiana University) on “Reverse Auctioning: Saving Money and Increasing Transparency” is a great read for government organizations and a good read for Supply Management organizations that are on the back-end of the supply management innovation curve, as long as these organizations don’t fall for some of the claims that are hyped beyond reality (with respect to the private sector). While a private sector organization will generally see all of the following benefits the first time they use reverse auctions:

  • downward prices
  • increased competition
  • real-time market pricing
  • process efficiencies
  • time savings
  • increased number of suppliers
  • sustainable cost savings

These are the benefits a private-sector organization will generally see the second time it runs a reverse auction:

  • real-time market pricing

That’s right. The only additional benefit an average private-sector organization will see continue to see the second time it runs a reverse auction on a category is real-time market pricing. Why? Let’s take the suggested benefits one-by-one.

  • downward prices
    Generally speaking, the first time suppliers are invited to take part in a transparent winner-takes-the-contract auction in a market that favours the buyer, the suppliers will compete so aggressively that they will even jeopardize profit margins. As a result, the prices they offer will generally be unsustainable in the long term. That is why auctions started to fall out of favour with market leaders in the mid-noughts. While the first auctions returned amazing results, the subsequent increase in raw material costs as demand rose resulted in their initial bids being unsustainable. Thus, the suppliers had to raise prices just to stay in business (and as soon as the power shifted back to them, the suppliers increased their prices substantially to make up for the loss).
  • increased competition
    Generally speaking, suppliers get so competitive the first time with their pricing that there is little, if any room, left to increase competitiveness the second time around.
  • process efficiencies
    Once you have shifted to the reverse auction model, you have already gained the process efficiencies you’re going to gain. Reverse auctions don’t get more efficient over time.
  • time savings
    Since reverse auctions don’t really get more efficient over time, once you have switched to the model, there are no more time savings to be gained.
  • Increased number of suppliers
    While electronic reverse auctions do allow more suppliers to be invited to the table without too much extra work, if the auction is opened up, all suppliers that want your business are going to jump in. And, when they fail to win your business, some of them will even back out the next time around.
  • Sustainable Cost Savings
    Simply ensuring that the organization gets real-time market pricing does not lead to savings. In fact, if raw material prices or demand is going up, it can lead to significant losses. The way to sustained savings in the private sector is through negotiating long term cost-reductions, process-improvements, and innovation commitments that will find additional ways to drive down costs once the fat is taken out of the supplier margin. This often requires a decision optimization, PLM, or SPM solution to find these new savings opportunities.

In short, properly used, auctions can be good for the private sector, but the greatness will only bee seen in the public sector where, on the other hand, organizations will generally continue to see the significant benefits each time a reverse auction is run on a category. Our next post will address why.