Category Archives: Cost Reduction

Trade Extensions Trades Up Its UI and e-Negotiation Management Capabilities

About a year ago, I introduced you to Trade Extensions (TE) on the eleventh day of X-Mas. A provider of an extensive on-demand e-Negotiation platform, Trade Extensions is an emerging player in the global e-Sourcing marketplace — one that offers negotiation management, extensive RFX, and (reverse) auctions with embedded real-time decision optimization.

Since my initial coverage, Trade Extensions has made the following significant updates to their platform:

  • a brand new UI across their end-to-end system
    The new UI is crisp, clean, and click-minimal. It’s quick and easy to use and very self evident. Plus, their online help pages are very extensive and updated regularly by the entire TE development and consulting teams.
  • integrated data cleansing & classification capabilities
    Have to fix a lot of data? Just create a rule and map it, just like you’d do in a spend cleansing and classification system.
  • OLAP Reporting for Scenarios
    Users now have access to full OLAP capabilities when viewing scenario results and reports.

In addition, the following features, which I have not covered before, have been improved:

  • extensive modifications to their bid supplement functionality
    Data — pricing, discount(s), rebate(s), etc. — can be captured at any level (supplier, business unit, plant location, etc.) and used for mark-ups, discounts, qualitative scores, or as the basis for any formula(s) the user wishes to define.
  • flexible bid forms
    Not only does TE support full Excel integration, but bid forms can be designed by the user to fit their business needs. There’s no need to force your information into a single system format. A user can create additional worksheets, add columns and rows to existing worksheets as required and add macros and formulas without interfering with the platform’s ability to read completed bid forms.
  • outlier analysis and statistical reporting
    The platform can automatically detect bids that might be too high or too low and flag them for your review (after you define your outlier rules, such as specific bid field values x% away from average / historic / custom calculation). The platform also includes a number of statistics reports, including a parameter statistics report that contains a detailed analysis at the lot and bid level.
  • composed filters
    Filters, which allow you to define constraints on any set of suppliers, ship from locations, ship to locations, products, etc., can now be defined on other filters to allow for very easy, and very powerful, constraint creation.
  • selection sheets
    Excel spreadsheets can be used to define allocation constraints, discounts, penalties, and multipliers … greatly simplifying discount and constraint creation in many cases.
  • project management functionality
    100% integrated into the cohesive e-Negotiation platform, the project management functionality allows for the creation of phases and tasks, the allocation of resources to phases and tasks, and the creation of scopes (by supplier, geography, etc.) as appropriate.

They’ve also continued to increase its power. Consider a recent project run by a financial services firm that tendered all of the components of a direct mail project that would result in the mailing of 1.8 Billion documents. The project, which consisted of 65,000 items, 60,000 transport destinations, and 400,000 bids from over 100 suppliers was valued at $1 Billion with a “B”.

The project was to ultimately deliver documents to the firm’s customers, but to get to that stage each part of the supply chain needed to be tendered. This included design, paper supply, printing, assembly, and transport. The project was completed as a single tender with offers collected on-line and all components tendered concurrently. In addition, suppliers could make conditional offers that reflected their own efficiencies that could present the firm with further savings. This was a project that could not even be attempted by hand as it would take someone close to two weeks just to scan each bid. There’s no way someone could even fathom attempting to optimize this scenario if all they had was a spreadsheet solution that couldn’t handle more than 65,536 rows.

Finally, TE is one of the few players in the market to make their pricing scheme public.

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Target Costing Works and You Can Do It Too!

A recent article in Purchasing on how “purchasing learns cost modelling” noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpool was able to close a gap of 30% between the target cost for an aesthetics module on one product and the initial design cost by way of a cross-functional team that included purchasing, marketing, sales, engineering, global design, production, and quality control. This greatly improved Whirlpool’s chances of hitting its profit target while saving it a bundle of money up front.

The concept, which dates back to the Toyota Production System and the beginning of Lean, is starting to take hold in a number of big companies like Boeing, Olympus, Komatsu, LG, and CAT and getting great results. But it’s not just limited to large companies, even though most of the articles I see, including this one, give you that feeling.

Thanks to not-so-new players in the market, like Akoya, which was founded in 2004 and offers an impressive industry-leading competitive banding solution, and Apriori, which was founded in 2003 and offers impressive industry-leading virtual production environments, mid-size companies can get in on the action at relatively low cost and save millions for literally pennies on the dollar.

With one (or both) of these partners on your team (as their solutions can be used complementarily, and I know of at least one big mutual customer that does so to great success), you can jump-start the process and see savings in a matter of weeks. Literally. But don’t just take my word for it. Take their customers’ words — and results. If you call them, I think you’ll find that they’ll happily give you relevant references. Their products help you get Lean fast, and it’s a shame they get so little press because it doesn’t take a massive Lean transformation to get started on your target-costing journey (even though that should be your ultimate goal).

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Vinnie Mirchandani on “The Costs of Software Renewal”

Today’s guest post is from Vinnie Mirchandani of”Deal Architect” and “New Florence. New Renaissance”. Vinnie, a founding member of the Enterprise Advocates, is a tireless advocate of trends and technologies that can help buyers get more for less.

Ray Wang gives us a timely reminder that “Labor Day (US & Canadian Holiday) traditionally marks the end of summer BBQ’s, the beginning of the fall conference season, and yes, the time to begin a review of your software maintenance contacts that expire at the end of the year.” (Software Insider, Sep 1, 2009)

I would say start with that — and then keep going. Take a look at all of your contracts that renew through the end of 2010.

Several good reasons to this include:

  • Establishment of a savings target on the total maintenance spend for 2010.
    Have your staff focus on every software contract, especially those that have been “auto-renewed” for years now because they were “small” and fell under attention thresholds. If you make the overall target part of a compensation plan for key IT and procurement staff, you’ll quickly find that Thar’s gold in them yellowing software contract files.
  • Multi-year maintenance deals which looked good when signed may now be overpriced.
    Current market trends are driving the cost of maintenance down, especially through third party services. Don’t assume they cannot be re-opened. (See Marc Freeman’s tips for “renegotiating with integrity”.)
  • If you don’t start now, you might not finish the renegotiations in time.
    Don’t overestimate the ability of your team to get organized — or underestimate the ability of the vendor team to stall — beyond the end of the year. If maintenance expires, and something goes wrong, you could be at the vendor’s mercy in renegotiations. Formally document your new process and let the vendor know next year will be different. Furthermore, be sure to allow 6 months for the renewal negotiation next year.
  • Even if you are looking to migrate, you will still need incumbent vendor support until the cut-over occurs.
    This holds true whether you are looking to migrate away from the incumbent vendor to SaaS, or to third party maintenance, or to do-it-yourself support (and readers of Deal Architect will know I am a broken record on the subject of considering all of these options). This will likely push you into 2010 planning and funding.

So, use Ray’s call for intensity over the next 3 months and build momentum for another 12 months. The payback will be huge — software maintenance continues to be one of the items on the IT menu with the most “empty calories“.

Thanks, Vinnie!

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Procurement Should Handle Your Travel Strategy

Every time a downturn hits, your average organization immediately responds by cutting the two T’s, travel and training, despite the fact that these actions are among the dumbest things it can do. First of all, you want your people to do more with less, which is something they can only do if they are well trained and up to date. Furthermore, with training usually clocking in at 10% of overall compensation for an average employee, or less, it’s a drop in the bucket. Secondly, you have to keep buying and selling … and as much as you’d like to think it can all be done “virtual”, sometimes you need face-to-face interaction. Ask the top 20% of your sales team the secret to their success and why they account for 80% of your sales and they’ll all tell you the same thing … face-to-face negotiations and customer relationship development. Then ask the procurement managers responsible for managing your top performing suppliers and you’ll hear the same thing … face-to-face negotiations and regular face-to-face interaction.

While you can certainly reduce travel in tough times, and significantly cut costs with good management policies, you can’t cut travel completely. And if the budget is tight, you certainly can’t let each department manage it willy nilly. That’s why I was glad to see a recent article in Procurement regarding travel expense management and how “purchasing insight figures big in winning strategy”, even if it was a long, meandering article that took too long to get to the point.

As the article points out, every company has two types of travel: necessary and unnecessary. Key contract negotiations with (big) potential customers, key contract negotiations with suppliers, supplier site inspections, and regular performance review meetings with suppliers are necessary travel. A finance or sales retreat to Tampa (from San Francisco, for example) is not. In the first case, the human interaction is often the key to a deal. In the latter, while your team does need an off-site every now and again for training, interaction, and a little relaxation, if money is tight, there’s no reason it can’t be at the glitzy hotel or conference center down the street. Many of us move and travel so much these days, it’s often the case that the city we know the least about is the one we live in. Procurement, used to strategically analyzing spend and supply, is in the perfect position to help you figure out what travel spend is strategic, what travel spend generates returns, and what travel spend should be cut. Thus, they’re in the perfect position to help your organization revise the travel policy so that you not only get the most bang for your buck, but turn the cost center into a revenue generating center.

Furthermore, as the organization that analyzes and negotiates deals day in and day out, they’re in the best position to help you select the right preferred carriers, define booking policies to minimize costs, and implement travel management systems, such as the service management solution provided by Rearden Commerce (the unique solution for travel procurement), that will help your employees adhere to policies and select the lowest cost options that meet their needs every time. So use Procurement to maximize your travel spend. Maximizing spend is what Procurement does best.

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Service Leaders Speak: Mark Usher of Treya Partners on “A Game Changing Procurement Initiative”

Today’s post is from Mark Usher of Treya Partners.

Procurement service providers can create game-changing value for their customers in the current economic climate through high impact sourcing initiatives in both DIRECT and INDIRECT spend areas. Since indirect procurement has been well covered in the blogosphere recently (and one can only keep readers interested for so long about how to design the perfect office supplies core list) I’m going to focus solely on how procurement can not only protect profit margins but create sustainable competitive advantage through world class direct materials sourcing. Whether your customers are in manufacturing, retail, food, or consumer packaged goods these procurement strategies will keep your clients afloat through the perfect economic storm and excellently equipped to maintain a healthy lead over their competition when balmy financial weather returns.

THE DIRECT MATERIALS GAME CHANGING PROCUREMENT INITIATIVE

Increase Gross Margins by developing a supply base that enables an organization to minimize cost and maximize customer service for its most highly demanded products.

Thousands of companies go out of business in recessionary economic environments because their supply chains are unable to deliver the very products that their customers are ready and willing to buy. It turns out that many of these same products are also their most profitable. In good economic times, a poorly performing supply chain like this doesn’t present too many obvious problems. If you’re selling a billion dollars of product at 20% gross margin you can swan along quite happily feeding an operating expense base of nearly $200 million, leaving millions of customers wanting stuff you’ve run out of and millions of dollars of stuff they don’t want sitting on store shelves or in the warehouse. However, when the downturn hits and your sales nosedive, your 20% gross margin is now trying to satisfy the same operating expense base. Hello negative operating income!

Procurement service providers can help companies maintain positive operating margins in recessionary or slow growth environments by helping them select suppliers that can deliver the lowest total cost inputs to production (or resale merchandise for retailers and distributors) while also supporting the highest levels of customer service for the end products that are in highest demand from customers. Low cost inputs result in a profitable product while high customer service results in an available product. Making a profitable and highly demanded product available is the greatest lever a company has to increase gross margin. What role can Procurement play in this? First, analyze historical order history by product (making sure to include backorders) and identify the 20% of products comprising the top 80% of customer demand. Then calculate profit contribution for each of these high demand products, where profit contribution is the difference between a product’s selling price and its total cost including procurement cost, transportation cost, and any internal manufacturing costs. Now identify the 20% of the high demand products that comprise 80% of total profit contribution. These are your company’s most profitable and highly demanded products! If an organization can ensure that these products are always available for their customers to buy, it will be fully realizing maximum potential gross margin for its industry sector.

Procurement’s role in helping an organization achieve this goal should be to facilitate a cross-functional strategic sourcing process that identifies, evaluates and selects suppliers based on their ability to meet exacting criteria for total cost management and customer service. Specifically, Procurement should work with stakeholders in marketing, manufacturing, distribution and other departments to develop weighted, metric-based criteria in areas such as a supplier’s capability to strategically source their own raw materials, implement lean manufacturing processes, deploy logistics strategies capable of consistently achieving 99% line item fill rates at their customers’ point of sale, and manage indirect operating expenses to maintain financial health while delivering low prices to their customers. The outcome of the strategic sourcing process should be a set of closely integrated supply relationships with a small number of supply partners that between them satisfy the ultimate goal of lowest total cost of ownership and highest customer service for the company’s highest demand products.

If you are a service provider with a competency for developing low cost/high service level supply bases, you can ensure that your customers will always enjoy gross margins in the top quartile for their industry. Particularly in recessionary or slow growth periods, a laser-like focus on service levels and availability for high profit/high demand products will guarantee financial health until the recovery is in full swing. And by helping your customers optimize their supply chains today, you will help them remain strides ahead of their competitors long after the recessionary period has ended. By maintaining above average profitability for their industry they will be able to make heavier investments than competitors in all aspects of their business, allowing them to maintain a perpetual competitive advantage.

Who said procurement was all about buying pens and pencils?

Thanks, Mark.

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