Category Archives: Market Intelligence

Economic Sustentation 09: Oil & Gas Price Shocks

For the last twenty (20) years or so the West Texas Intermediate Crude Oil Price chart has been bouncing up and down like a yo-yo in the hands of a novice who doesn’t know how to work it, but doesn’t stop trying. And any other chart you pull up for international oil and natural gas prices is going to look similar. In other words, as we stated in our damnation post, within a one-year period, prices can double or be cut in half with little or no warning. And either situation will run havoc with your supply chain.

If prices double seemingly overnight, your costs are going up — way up. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, the supplier is not going to put up with it anymore, especially if they are struggling financially. Then the shipments stop.

But it’s not much better when prices drop. While the first to cry foul when prices rise, suppliers are the last to play fair when the prices drop. Arguments that the deal was so good they were losing money on delivery, arguments of higher overhead costs, and arguments of temporary blips are brought to the table whenever you ask for a price concession, even if the contract guarantees you one.

So what can you do?

1. Tie Prices to an Index – Updated Daily, Averaged Weekly or Monthly

Base the contract on index prices, averaged weekly or monthly, and tie the price to that cost on the purchase order date. You’ll pay more if prices rise quickly, but you’ll also pay less when prices fall faster than expected. Then, you can simply acquire good prediction algorithms that have performed well over the long term, and plan for the shocks and not waste time arguing when they happen, leading to much more cordial relationships that can be focussed on service and customer service.

2. Master Predictive Analytics

Don’t just acquire an algorithm, understand it, and run models with slight market changes to see how oil prices shift when other correlated indicators shift. Get better than the competition and over the course of years, you will always, always, always come out ahead.

OR, if this is too mathematically advanced for you, and you are willing to accept sub-optimal outcomes (which will still be better than what you get now)

A. Always Lock Prices in for the Long Term.

So the cost stays the same unless a ceiling or floor, defined as a price percentage, is met. If the average price over a month goes up or down more than, say, 10%, then the price shifts by a fixed percentages, such as half of that. In addition, negotiate for clauses that allow the organization to auto-renew automatically at the current price at an time in the last six months, for the same time-frame.

B. Make sure the ceiling and floor shifts with every price change.

While the cost shift will be absolute, the price should only change every time the price changes by more than a fixed percentage from the price being paid, not the locked-in price.

C. Reduce Oil and Natural Gas Dependence.

Invest in renewable power sources such as solar, hydro, and geothermal so that, over time, you become less dependent on oil and natural gas and the price uncertainty they bring.

Why You Need MROaaS

Yes, you need MROaaS. Everyone needs MROaaS. ( But don’t tell your boss you need MROaaS, spell it out, because we all know what she’s likely to hear when your tongue trips over this one. 😉 ) Next to T&E (not T&A), it’s probably the biggest tail-spend savings opportunity in the enterprise. And it deserves to be addressed.

MROaaS, short for MRO-as-a-Service, which is itself short for Maintenance-Repair-and-Operations-as-a-Service (which is very unsexy when you say it this way), is, for large organizations that need to maintain a lot of inventory on hand, the biggest overlooked outsourcing opportunity in the business. Inventory is costly (and many estimates put annual inventory overhead at 25% of product cost). But not having the right inventory at the right place at the right time is even costlier. (Downtime leads to lost production and, ultimately, lost sales which is very costly when you still have to pay the day-to-day overhead, including your employees’ salaries.) And MRO is often the biggest consumer of long-term inventory (because the majority of goods for sale will move in and out within a few months, or even a few weeks, while MRO inventory could shit on the shelf for two years). So inventory optimization alone is a good reason to have good MRO.

But that’s not the only reason to have good MRO. The reality is that, in an average organization:

  • over 20% of inventory on the shelf is excess and/or obsolete
  • fill rates for most MRO storerooms are closer to 75%
  • there is supplier “lock-in” even where alternative sources of supply exist

And the losses mount quickly.

But these aren’t the only problems organizations face. Most also have to deal with

  • recall inventory not getting identified and then being used when it shouldn’t (which creates hazards)
  • significant expediting when a part is out of stock and it is needed yesterday
  • inefficient returns management when the wrong part gets shipped or a part is identifies as bad six months (or three years) down the road (when it might not even be returnable)

And the losses continue to mount.

But with good MRO:

  • excess and obsolete inventory can be reduced by up to 90% (or more)
  • fill rates can exceed 95%
  • alternative sources of supply are easily identified
  • recall inventory is immediately identified and returned
  • expediting becomes the exception rather than the rule
  • returns are properly handled in a timely fashion

And the organization stops bleeding red.

And this is why the organization needs good MRO. But why does it need MROaaS. Slowing down the cash hemorrhage is one thing. Improving the organization’s overall health is another. Good MRO can add value in a lot of ways. In addition to the inventory optimization that will see the results above, it can also provide:

  • proactive shipment monitoring to insure the right shipment is made at the right time
  • lean process improvement to take time and cost out of the process
  • supplier consolidation to allow for more volume-based cost reduction opportunities and more time to focus on each supplier
  • supplier development programs to insure that supplier performance improves over time

And this is just the tip of the iceberg a good MRO program can provide. But a typical organization, which never gets to the MRO tail-spend, is not an expert in MRO. It’s not even a novice in MRO management in most cases. This is where MROaaS comes in. For the most part, the only organizations that are true MRO experts are those that provide MROaaS. And since it takes true expertise to go from cost reduction to value generation, you need MROaaS.

And if you are still not convinced, the doctor and the maverick have put together a detailed four-part series over on Spend Matters on the subject that should provide all the education you need on why MROaaS is something that has to be considered if MRO spend is a significant part of the organization’s tail spend. Parts I and II are already up and available here:

  • MRO as a Service (Part 1): Embedding Procurement as the Value Engine
  • Unpacking and Applying the Value Streams of this Model: MRO-as-a-Service (Part 2)

Influential Sustentation 95: Competitors

I know this appears to be an oxymoron, but competitors do sustain you. Without competitors, there is no validation for your product, your market, and even your existence. But this isn’t a blog about Sales, this is a blog about Procurement. Believe it or not, competitors also help to sustain your Procurement practice. And we’ll get to that, but first we need to discuss the damnation that competitors can be.

Competitors are an outright damnation to the whole organization. Marketing makes an announcement, your competitors try to one up. Sales signs a great customer, your competitors try to weasel into the customer’s good graces through the backdoor. Your R&D makes a great discovery, and here comes the corporate espionage. But from a Procurement point of view, they are also damning.

  • They compete for limited supply and drive prices up.
  • They compete for limited talent and drive prices up.
  • They compete for limited expert (technology) resource time.

Ouch! How can they possibly be a sustentation. Well, this is an example of where when the going gets tough, the tough gets going.

Your Procurement can wallow in self-pity every time the competition scoops up a limited supply at a great price before you, steals the talent you want, or gets the top expert at the systems integrator to work on their project first, or you can recognize that anything they can do you can do better. And here’s where you start.

  • Monitor the market constantly, on-line, and in real-time to not only detect the rare occasions when forward auctions get listed (because a competitor went out of business or overbought and has to dump), but to detect events that could impact supply. If a natural disaster wipes out a significant portion of supply, then the market is just going to get tighter and having advance knowledge of the pending crunch can allow you to stock up on inventory early and cut your competitor off, or at least get pre-crunch prices locked in.
  • Invest in and understand the talent market, what each generation wants, and put together comprehensive work-life balance packages that will be more attractive than a competitor who merely promises a slightly above market salary (and nothing else).
  • Make sure to negotiate up-front sufficient access to any resources you will need, guaranteed milestone dates on the integration project, and penalties for non-performance.

There are other things you can do, but if you start here, you will suffer less supply crunches, attract more talent, and get your projects done on time. And this is a great start.

There’s Nothing Wrong with a Paid Pilot – As Long as it’s a Real Pilot

Over on Spend Matters, the analyst team has been posting their thoughts on the market outlook for the next three years (instead of making pointless predictions like their peers, and we all know what the doctor thinks of predictions, which was reiterated in this post), and most of them are logical and expected. However, one in particular needs to be addressed, and repeated. And that’s the fifth of the prophet‘s predictions in his “E-Procurement Market Outlook” on Spend Matters. In particular, the prophet‘s prediction that

Paid Pilots [will] Become More Frequent

There are two types of pilots. The kind where a provider takes data from a past event or project, runs it through their system, and provides you with a report of what they would have done and the results they would have achieved and you compare it to the results you achieved to see if it’s worth considering the system in depth.

Then there is the type of pilot where you try out the system on a live event or real data, replace your current system with the new system temporarily, or deploy the system for a specific project or division to compare operation and results side-by-side with the live system.

Before an organization invests a large amount of money or a large amount of effort to switch to a new system, and after it runs an initial pilot on historical data to determine that a full pilot is worth it, this is a great idea as the organization should be sure that the system will work as intended before it implements the system to support critical functions, but the pilot will only be effective if both parties take it seriously and make their best effort to get the best, and most realistic, results.

Even if the platform is a true SaaS solution that runs on the cloud where the provider can instantiate a new instance simply by clicking a button that creates a new, default, private instance and can make it available by simply creating a user name and password, configuring it for your use will take a lot of effort on the part of both parties. Even if everything in the Admin section and MDM control panel can be 100% user driven, until you have sufficient training and experience with the platform, you’re not going to be able to hook it into your ERP and existing supply chain / Sourcing / Procurement platforms, configure the workflow, create the secure user hierarchy, and complete other configuration tasks. Moreover, you’re not going to know the unique features, the features that can generate the most value, or the best practices. For best results, the supplier has to be actively engaged.

And in the business world, clients come first. If you’re not a client, while the sales and account teams will do their best to make you successful, they have paid clients to support. If those clients need help, they come first. Plus, at any time, they have other organizations they are trying to sell, as any sales person or account manager that doesn’t spread the risk across multiple potential client organizations is not a sales person or account manager that is going to keep their job very long.

However, if you pay for the pilot, the provider’s costs, and risks are covered and the provider can dedicate the resources that you need to get the most that can be obtained from the platform. If every pilot is paid, the provider can hire more resources that can be dedicated to pilot success.

In other words, if success is desired, then the organization should pay for a pilot – as long as it’s a real pilot to support a real project (and not a demo analysis on historical data, that should be free), the provider treats the organization as a real client for the extent of the pilot, and, the provider is not profiting off of the organization. The pilot should be priced to cover cost, nothing more, nothing less.

And, as the prophet points out, done right, the benefits of a paid pilot include tactical ones such as building support for the cost/benefit analysis of different roll-out options (e.g., standardization vs. customization) as well as broader organization involvement in the overall selection of a solution (which will pay dividends in frontline adoption during a full scale deployment). And you can have confidence the solution, and solution provider, will work for you before signing a multi-year deal — all for the cost of a short consulting engagement (which will likely bring more results than a typical consulting analysis will).