Originally posted on on the e-Sourcing Forum [WayBackMachine] on

Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.

A Supply Chain Finance Solution, in comparison, is a combination of trade financing provided by a financial institution, a third-party vendor, or an enterprise itself, and a technology platform that unites the trading partners and the financing partners electronically and provides visibility into the various supply chain events that can serve as financing triggers.

Supply Chain Finance is a lot more than just factoring, early payment discounting, or inventory shifting. It’s balancing credit, financing options, inventory management, and other supply chain variables to optimize working capital, and much more. Thus, given the complexity of supply chain finance in today’s globalized supply chains, it is important to have some good strategies in order to ensure that you are reaping the benefits that are there to be gained. It’s also equally important to understand that some of the classic strategies are more apt to be strategies for failure than for success. To this end, here are three strategies for success and three strategies for failure to avoid to start you on your supply chain finance journey.

Strategies for Success

• Balance Open Accounts and Letters of Credits
  It’s important to understand an organization’s cost of capital versus the supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into the cost of goods sold.
• Improve Forecast Accuracy
  One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.
• Lower Your Supplier’s cost
  A recent Aberdeen benchmark report found that 39% of suppliers indicated that their top issue is their ability to access financing at acceptable terms. The more it costs a supplier to make a product, the more it will cost a buyer to buy it. Consider using early payment programs, inventory ownership solutions, and / or virtual consignment financing to lower your supplier’s costs, and your own in the process.

Strategies for Failure

• Shifting Inventory to Suppliers
  Considering that most suppliers have to wait an unduly long time between their initial cost outlay to make a product and the eventual payment for that product in an environment where many buyers are now demanding payment terms that include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have large storage facilities or inventory management expertise, this drives up their costs from all angles. Their financing charges go through the roof as they have to take out more high-cost short-term financing, often at rates of 20% to 40% per annum (which are especially common in developing economies), their costs of operation go through the roof as they have to either acquire additional assets or pay a third party to manage the inventory, and their opportunity costs rise as they are prevented from ramping up production, due to lack of funds and storage, on New Product Development that could ultimately prove more profitable to them, and to you as the buyer. All of these costs just increase their cost of goods sold, and your price, and your “brilliant idea” to get rid of inventory carrying charges has only served to increase the total cost of ownership of the products you are buying. Nice move, hotshot!
• Increasing Days Payable Outstanding
  Most suppliers only have constricted access to short-term financing with a significantly higher cost of capital. This cost-shifting to suppliers might result in better Days-Payable-Outstanding (DPO) statistics to a buyer in the short term, but ultimately results in a less financially stable, and thus higher-risk supply base, and, eventually, an overall higher cost of goods sold to your supplier and you versus your competitors who have mastered sound SCF practices.
• Mistaking Early Payment Discounts and Factoring for Financing Options
  Early payment discount programs, regular or automated, do not address the root causes of financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of shifting inventory to a supplier, you’re essentially shifting costs and this often results in cost increases, rather than cost reductions, across the supply chain.

For more insights on Supply Chain Finance, check out the wiki-paper over on the e-Sourcing Wiki [WayBackMachine] which includes an overview of the benefits to buyers and suppliers, strategies for success, strategies for failure, and tips on both buyer and supplier supply chain finance implementation.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Monday, 8 October 2007

Even before Aberdeen came out with its “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of E-sourcing Savings” in June of 2005 where they determined that “the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify average incremental savings of 12% above those that basic, price-focused auctions alone have generated“, some of us already knew that decision optimization was the future of strategic sourcing.

However, even though Aberdeen confirmed this result in their January 2007 follow-up entitled “The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal” which found that “enterprises that are employing advanced sourcing techniques are still identifying an average savings of 11.9% per sourcing event” and that “best-in-class enterprises are identifying an average savings of 13.7% per event“, I still need to ask the question “Why Aren’t You Optimizing Your Sourcing Decisions?”. Despite the hundreds of success stories that can be culled from previous customers of some of the leading vendors, only 21% of companies plan to consider such technologies in the next two years. I can not help but ask why?

Many innovative service and solution companies in the e-sourcing marketplace have been betting for the last five to ten years that optimization is the wave of the future. It’s true that many have met with limited success to date, and that many more are out of business, but this is simply what happens in an emerging industry, especially when it’s on the tail end of a boom. The reality is that, in their haste to get something to market, many of these companies did not understand what optimization really was, did not have the expertise or skills in house to pull it off, did not focus on usability, did not enable their customers in the collection and cleansing of the large amounts of data required, did not integrate well with the other sourcing products that encapsulate the processes that come before and come after decision optimization, or failed in all these regards. Furthermore, many customers were not ready as you need a good process in place, need the tools to collect the data, and need the right training in strategic sourcing to maximize benefit from such a tool.

But we’re not in the late nineties anymore – this is the late naughts – and many things have changed. Many leading organizations not only make use of leading e-Sourcing technologies in their end-to-end sourcing process, but have good e-Procurement and data management technologies as well. They have highly capable people, have squeezed a lot of the fat out of supplier margins through e-Auctions, and have sufficient data to do meaningful spend analysis to spot opportunities. But even though they are prime for it, they not only are not using, but are not even considering decision optimization technology. And I’m puzzled!

Is it because they think it’s not appropriate to their situation? Is it because they think you need a Ph.D. to utilize such technologies? Is it because they think the products are just not where they need to be? As I’ve argued before, optimization is always appropriate – even if just a sanity check on the intended award. There are a few situations where it will not save you money, but these are very few and far between and neither I, nor any company I’ve worked with, have ever encountered a situation where it didn’t eek out at least a couple of additional percentage points of potential savings on any moderately complex scenario. Although you often need a PhD to design and build these tools, there’s no reason the user interface needs to be any more complicated than your run-of-the-mill business intelligence tool that you use every day – and the good providers realize that and have spent a lot of time, effort, and money, making the tools easy to use. Although many of the tools even five years ago were just not where they needed to be in at least one respect, that’s not the case today. Many are where they need to be, or close enough, for many common scenarios that their application will realize the savings that Aberdeen has found.

With rising raw material and energy prices, rising transportation costs, lengthening lead times due to labor force shortages and increased regulation, and constant consumer demand for shorter product cycles and lower costs, the time for decision optimization is now. If you have it as part of your e-Sourcing, e-Procurement, or e-Logistics suite, use it. If not, get it. There are good solutions out there now, and no reason not to use them.

For more information on decision optimization, and strategic sourcing decision optimization, check out the “Strategic Sourcing Decision Optimization: The Inefficiency Eliminator” wiki-paper over on the e-Sourcing Wiki [WayBackMachine], the two-part “What is Supply Chain Optimization?” podcast over on Next Level Purchasing (which can also be read in Part I Transcript and Part II Transcript), or my “Decision Optimization” posts over on Sourcing Innovation.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Tuesday, 11 September 2007

Spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value. But it’s more than determining (i) who is buying (ii) what (iii) from whom (iv) when (v) and where (vi) and at what price. It’s about finding opportunities for savings across your organization, as obvious and non-obvious as they may be.

For example, here are five applications of spend analysis:

• Commodity Analysis
  Build a separate, commodity specific dataset to determine how much of a commodity an organization is buying, if it’s being charged consistently, if the charges correspond to any contracts in place, and if there are any opportunities for spend consolidation.
• Rebate and Refund Collection
  Did you know that you’re probably paying too much for your office supplies and high-tech equipment? Some of the more innovative consultancies have found that many office supply and high-tech companies overcharge across the board, even when contracts are in place. For example, many large organizations sign “best price” agreements with a high-tech supplier for all computer purchases over the next year, but in reality, if they don’t watch prices, most often end up paying the same amount throughout the length of the contract term for the exact same configuration even though prices tend to decline a few percentage points every month for a given hardware configuration. Also, if office supply agreements are for fixed quantities, such as a 10-pack laser printer toner cartridges, it’s often the case that an organization will end up paying (significantly) more per unit if they order less or more. And then there’s the rebate – which you only get if you order a certain volume and, in many cases, prove it and ask for it. I’m not saying these overcharges are the product of willful malicious intent on the supplier, but that such inconsistencies can slip through both parties if proper systems are not in place to properly process invoices and analyze spend.
• Maverick Spend Identification
  $10M in negotiated savings is simply that – $10M in negotiated savings. For the savings to hit the bottom line, the contract, and all its terms, have to be adhered to. If your buyers still buy off contract, you could lose out on all of the savings, and more. Spend Analysis can not only detect how much spend is off contract, but if proper data is kept, it can identify which supplier is getting the bulk of the maverick spend, what department is causing it, and, in some cases even the individual behind the problem.
• Fraud Reduction
  Most employees are decent, hard working people. In fact, most are more honest than the employers they work for. (And if you don’t believe me, read the Freakonomics book or blog which chronicled Paul F. and his honor system bagel operation where he found, with 20 years of data to back it up, that executives are often less likely to pay on an honor system.) But if your company is large enough, chances are you have one or two bad apples trying to defraud you. And even though they might not be trying to ring up $241,000 at a strip club or charging you 998,787 to ship two 19-cent washers, chances are, if they are of the right persuasion, they are bilking you out of thousands of dollars a year. Without a good spend analysis tool, how will you ever find out that your salesperson is submitting the same 378.65 receipt for customer entertainment 6 times, or that your new executive is not only paying for customer entertainment on his new corporate credit card but his own golfing excursions as well, or that the 378.65 charge from a generic entertainment company is not for a meal for 4 client representatives but for your new executive’s lap dances at his favorite strip club? Don’t laugh and don’t say that never happens – it does – and sometimes all too often at big companies that have transactions that is an order of magnitude more than their accounts payable department can process and review manually.
• Opportunity Assessment
  Not only can it tell you who is buying what from whom, when, where, and at what price, it can tell you whether or not there are large variances in the spend for the same commodity, whether spending conforms to appropriate market indices (assuming you have access to such data), and whether there are opportunities for supplier consolidation or rationalization. The limits of a good spend analysis tool are only those imposed by your own imagination.

For considerably more information on the Spend Analysis process, it’s benefits and associated best practices, see the “Spend Analysis and Opportunity Assessment” wiki-paper (because there’s gold in those hills of data) over on the e-Sourcing Wiki [WayBackMachine]. In addition to a thorough overview on the spend analysis process, technology requirements, and technology approaches, it also describes, in detail, what spend analysis really is, why it is necessary, what the various approaches to it are, the challenges associated with a project, and some of the more common applications to which a sourcing professional can apply it.

Additionally, you may elect to download a free copy of the latest Aberdeen research on spend analysis, which was available for a limited time.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on April 9th, 2009

A great sourcing department is led by a great sourcing leader – but what does a sourcing leader do that sets her apart from everyone else? Simply put, to earn her place at the top, she astricts. More specifically, great sourcing leaders analyze, strategize, believe in team recognition, innovate, focus on compliance, use technology, and always have an eye out for sustainability. More specifically:

Analysis

A sourcing leader understands the importance of analysis and carefully analyzes the situation before making important decisions, putting something up for bid, or signing a contract. She has a data-centric approach, based on spend analysis, that she uses to cut through the nonsense and find the real opportunities.

Strategy

A great sourcing leader recognizes that the truly successful don’t get ahead by flying by the seat of one’s pants. She also recognizes that no one gets ahead by just focussing on day-to-day tactical operations. A great sourcing leader has a strategy. One that is built on a solid foundation, based on detailed and thoughtful analysis.

Team Recognition

A great sourcing leader is a team builder that believes in regularly recognizing and rewarding her team for her accomplishments. This recognition comes in the form of public praise when they succeed, bonuses when they exceed savings targets, and a salary that’s at least at the high end of market average.

Innovation

A great sourcing leader is focussed on constant innovation and improvement that enables her, and her organization, to not only adapt to the market, but to lead it where they want it to go. A great sourcing leader is constantly on the lookout for new innovations in technology, business process, and relationship management that she can use to improve the operations of not only her unit, but the enterprise and supply chain as a whole.

Compliance

A great sourcing leader recognizes that compliance is not just the multi-faceted buzzword of the day, but the key to realizable savings, low risk operations, and positive press.

Technology

A great sourcing leader is always on the lookout for new technologies that can help her team get a better handle on the supply chain as a whole as well as for new best-of-breed technologies that can improve performance in key activities with the potential to generate significant value or advance the overall organizational strategy.

Sustainability

A great sourcing leader knows that sustainability is more than just a buzzword, it’s the key to successful business year after year. That’s why she makes sure that each strategy employed is sustainable, that each supplier used is responsible, and that environmental and social responsibility is always considered.

For more information on The Seven Scruples of a Sourcing Sensei, I strongly encourage you to check out the new “Sourcing Leadership” wiki-paper over on the e-Sourcing Wiki [WayBackMachine]. Besides diving deeper into each of the actions that a sourcing leader does differently, it also discusses “The Seven Savors of a Sourcing Sensei”, or the seven key fundamental skill sets that set sourcing leaders apart from others.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Tuesday, 11 December 2007

Ten years ago, the world was a simple place to do business. Make an honest product, follow the import and export regulations (which, relatively speaking, were few and far between), avoid known toxins, and you were all set to go. Today – different story. You have to document, and report on, everything you do, familiarize yourself with various hazardous material safety and bioterror acts, and keep on top of a never ending slew of regulatory compliance acts coming out of the European Union, including the directives on the Restriction of Hazardous Substances (RoHS), Waste Electrical and Electronic Equipment (WEEE), and End of Life Vehicles (ELV).

Probably the most important act in the US is the Sarbanes-Oxley Act (SOX) of 2002, otherwise known as the Public Company Accounting Reform and Investor Protection Act of 2002, which established a new quasi-public agency (the Public Company Accounting Oversight Board, or PCAOB), that was drafted and passed in response to a number of major corporate accounting scandals (including Enron, Tyco International, Peregrine Systems, and WorldCom) in an effort to restore public trust in accounting and reporting practices.

The Sarbanes-Oxley Act contains a number of major provisions that address the disclosure of internal controls at public companies, the certification of financial reports, auditor independence, personal loans to any executive officer or director, insider trading, and required disclosures. Basically, auditors must be independent, independent auditors must “attest” to the disclosure of internal controls, the chief officers must personally certify the financial reports, personal loans to executive officers or directors are banned, and insider trades are prohibited during pension fund blackout periods. Failure to comply with any of the requirements could result in enhanced cival and criminal penalties for violations of securities laws.

In Europe, it’s a different story. Depending on the products you make, it’s either the Restriction of Hazardous Substances Directive (RoHS) that restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment; the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) that broadly covers the production and use of chemical substances; the Waste Electrical and Electronic Equipment Directive (WEEE) that imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers; the end of life vehicles (ELV) that force vehicle producers to have networks of facilities where the last owner of a vehicle may freely deposit such vehicle at the end of its life; or the cosmetics directive that was created to ensure product safety and public health while allowing the free movement of safe products within Europe.

Globally, we have the Kyoto Protocol, various industry codes of conduct, and forthcoming RoHS and WEEE equivalent acts in Asia. It’s a regulatory whirlwind, and it’s not about to stop. That’s why the e-Sourcing Wiki [WayBackMachine] has started a wiki on regulatory compliance. Check it out!