Category Archives: Market Intelligence

Too Many Marketing Fingers in the Procurement Pie? First You Need To Get Their Attention.

Does this sound familiar? The CFO has mandated a 10% across the board spend reduction, and it’s Supply Management’s time to shine. You want to help, but, as expected, Legal and Marketing are refusing your help because, when it comes to litigation, you need the rain maker and when it comes to creative, you can’t put a process behind it and get results. As a result, Legal and Marketing costs are still spiralling out of control while you watch millions being wasted on e-Discovery, cookie cutter legal services, print, basic media production services, and unmanaged third party spend. Getting this spend under control could save Legal and Marketing so much that they could afford to pay even more for the rain-makers and creative geniuses they so covet, but still deliver savings and ROI to the business. But how do you get your point across?

The process is two-fold. First, find out who in the C-Suite wants you to get your message across and help the Marketing organization save money and have them strong-arm the Marketing leaders into a meeting with you in a wireless-signal free zone where these Marketing leaders will be forced to give you their undivided attention. Second, have a firm grasp of what you can bring to the table to help Marketing enhance their organizational performance and make sure you can convey it to Marketing in a crisp, clean, clear, and concise presentation.

Specifically, make it clear that you don’t just bring cost-cutting to the table — you also bring value generation support services which include, but are not limited to:

  • Decision Support
    Your expertise in supplier identification, profiling, and evaluation can help Marketing evaluate current relationships and identify new agencies that might more closely align with Marketing needs.
  • Benchmarking
    Your expertise in spend analysis and visibility can help Marketing get a grip on what it is spending compared to what it should be spending (according to existing contracts and rate cards) as well as a breakdown on how much is being spent on each category (print, media production, creative, etc.) and what opportunities there are for consolidation and spend reduction by leveraging volume and disassociating physical product-based spend from creative spend. (Since Marketing generates value based upon the power of the campaign they deliver, it makes sense to pay Phillippe or Eduardo the $500 an hour he wants for his creative genius if it generates a campaign that gets you noticed more than the competition. After all, he’s just one guy and even if he works 3 months on the campaign, that’s only $240K on what could be a 10M campaign. However, it doesn’t make sense to pay $50 an hour to a guy running the printer at Kinkos, especially since you probably are producing so much paper over the year that you are paying the equivalent of 5 guys at Kinkos to sit there full time and run printers, who should be paid $15 an hour. Net result, you’re overspending $350,000 for copy services — way more than the $140,000 you might save by hiring a second-rate creative genius who might end up generating a second rate campaign that actually hurts your brand and costs Sales $1,000,000 by cutting the wrong corner.)
  • Contracting
    You deal with negotiations and contracts day-in and day-out. As a result, you have the methodology to keep the process moving nailed down, the knowledge to know what needs to be addressed, the ability to work with Legal to create a standard Master Services Agreement template to streamline every negotiation, and the skills to put together an all inclusive Statement of Work that protects both parties and includes rate cards that are fair and beneficial to both parties.
  • Strategic Focus
    Marketing’s strength is in campaign management and strategic brand and product positioning, not in the tactical Procurement process, contract negotiation pitfalls, or the back-end project management, that is often left up to the agency. Your presence lets Marketing focus on it’s strength and not waste time on areas that don’t increase its value to the organization.

Of course, this is just the first step.

Is Supply Chain Finance the new Prisoner’s Dilemma?

In the classic logic problem known as the prisoner’s dilemma, there are two prisoners, being held on a minor charge (such as breaking and entering) which comes with a 1 year prison term, suspected of conspiring together to commit a serious crime (such as grand larceny). There is little actual evidence to convict either of them and the police are relying on a confession by one or both prisoners to convict at least one of them of the more serious crime. In an effort to get this confession, the two prisoners are separated and each is offered an identical deal. The deal is that if one prisoner confesses, he’ll be set free, instead of spending 1 year in jail, and the other prisoner will get a 3 year sentence. If neither prisoner confesses, they each do 1 year, and if both prisoners confess, they will both serve time, but only 2 years each for coming forth. What should the prisoners do?

When the dilemma is analyzed using game theory, each party is most likely to betray the other and spend 2 years in jail rather than remain silent and enjoy the best possible outcome of only 1 year in jail. This is because, regardless of what the other prisoner chooses to do, each prisoner believes they improve their likely outcome by confessing, even though an analysis of the possibilities …

 

P1 Confess? P2 Confess? P1 Sentence P2 Sentence
N N 1 1
N Y 3 0
Y N 0 3
Y Y 2 2

 

… indicates that each Prisoner is expected to do an average of only 1.5 years, and betrayal increases time served. Why? It has to do with something called the Nash equilibrium, which is a solution concept of a non-cooperative game where no player has anything to gain by changing only their own strategy (which is often the case when both players have to choose their strategy in secret) and results from the fact that the payoff relationships from each prisoner’s perspective make confession the only case where each player would do worse by unilaterally changing strategy. In simple terms, this means that if prisoner 1 chose confession and prisoner 2 chose confession, then either prisoner changing their choice on their own would result in that prisoner serving more time. In psychological terms, if you don’t confess, and your colleague does, you serve an extra two years while he walks free.

So what does this have to do with Supply Chain Finance (SCF)? Peter Loughlin does a great job making the comparison in his new Purchasing Insight paper on “Demystifying Supply Chain Finance”, sponsored by Taulia. Simply put, even though the best situation for many buyer-supplier relationships (where a SCF solution that would help both parties is not available) is the status-quo (of no supply chain finance), there is often an incentive for one party to choose a solution that benefits them, even though, as in the case of the prisoner’s dilemma, the choice of that solution often damages the other party considerably (by adding cost to the other party, just like the prisoner’s dilemma adds time).

The reason for this is that each primary SCF solution, for reasons that are clearly explained in the white-paper, has a sweet-spot and any relationship that falls outside of that sweet-spot isn’t helped by the solution, and may even be hurt by it. In a very cramped nutshell:

  • Supplier Finance only helps large volume/dollar suppliers of large buyers because banks aren’t willing to bear the cost of on-boarding the long tail of the supply chain
  • Dynamic Discounting only helps favoured suppliers because most buyers typically don’t’ have the liquidity to pay the entire supply chain early and not all suppliers have e- solutions that integrate with the buyers’ dynamic discounting solutions (assuming that the buyer will extend or negotiate terms across the entire supply base)
  • Pre-Shipment Finance doesn’t help the buyer or give the supplier access to borrowing at the buyer’s creditworthiness

For more details, download Purchasing Insight’s new white paper on “Demystifying Supply Chain Finance”. It’s worth it.

Procurement Key Issues from the Hackett Group, Part II

Last month, the Hackett Group, as part of its Procurement Executive Insight series, released its “2014 Procurement Key Issues” report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments. It had some very interesting findings, including the fact that Procurement in 76% of companies surveyed indicated that a top priority was to expand procurement’s scope/influence. This is logical, but a little unexpected giving that the top Management priorities are to grow revenue and improve margins / profitability, at 66% and 61%, and most companies still see margin improvement in an uncertain market as cost reduction since limited or no-growth markets don’t generally take favourably to cost increases.

It seems that, as Hackett notes in its insight, we have the situation where many of the Procurement groups in Hackett’s survey stable have reached the upper limit of cost reductions possible in categories they actively source today and are interested in taking on new spend categories in an effort to unearth additional savings and meet the savings targets they are still being (implicitly) given for the organization to achieve it’s margin improvement.

While I applaud the long-needed alignment from this group of Procurement organizations that are obviously in the above-average and best-in-class categories — because savings are a thing of the past with (hyper)inflation returning to historical norms, raw materials in many categories become scarce (and supply barely meeting demand), and transportation costs continuing to increase — I worry that the finance organization is not yet aligned with the need and, when push comes to shove, will resort to a strong arm instead of a gentle hand, putting Marketing, Legal, and other non-physical product organizations on the defensive.

Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

This will not only result in a push-back from the internal departments that Procurement needs to help, but from the vendors and third-parties that the Marketing, Legal, and other non-physical product departments rely on to keep the organization running. The disdain dripping from the forced smiles on all sides will be visible across the room …

Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
And hopes they won’t wind up dead

You have to remember these are vendors who are used to doing deals with a wink and a smile in the back room or skybox of their favourite entertainment venue and sealing them with a firm handshake. Terms? Conditions? Agreed Upon Rates? Performance Requirements? Contracts? This is a whole new ballgame to a vendor used to doing the work and sending a one-line invoice when it’s done.

Where the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road

The vendors are going to try and bypass Procurement at every opportunity …

Rep in the front seat
Lawyer in the back seat
Gettin’ it on the dotted line
Got a snake in the bed
Lord, hissin’ on the headboard
Trying to lure you offside

… and if the Marketing, Legal, and other affected internal departments aren’t onside with the new process 100%, any chance of savings and spend control are going to fly out the window. Not only will a side-stepped process result in a deal that is at least as expensive as last year’s deal (and probably more as the incumbent preferred vendor will probably cry poor due to inflation), but nothing will be done to reduce the demand side volatility, threat of competition (which often requires true partners and not just preferred vendors), and supply volatility that are the top three business drivers that Procurement has identified as needing to be addressed.

In summary, the fundamental Procurement focus is right, but has the rest of the organization caught up? And does Procurement really have a firm handle on what it needs to do to extend its reach and deal with all of the external business drivers that are hitting it hard, which also include the need for more (trained) talent and the skills gap, the increasing regulatory risk around the globe, and risk of a truly global economic crisis? Looking at the technology priorities, SI is not certain that it does.

In closing, the 2014 Procurement Key Issues report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments is an interesting and thought-provoking read and you should add it to the top of your reading stack.

Procurement Key Issues for 2014 from the Hackett Group, Part I

In song, to the music of Where the Rubber Meets the Road by Meatloaf.

Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
And hopes they won’t wind up dead
Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

Son, I’m Mr P.C.
And believe you me
I’m the ultimate king of correct
And if you wanna make it
You gotta make them take it
As a sign of your deep respect
If you’re gonna do it
You gotta see through it
To the honour-bound duty it is
You can call Branding absurd
And flip Agencies the bird
Just remember what your mission is …

When the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road

Ya say “Girl, you’re a beauty
But I’m no beast
I got a little contract right here
See, we can slam on the brakes
Anytime we got the stick
Even if we’re in fourth gear”
Rep in the front seat
Lawyer in the back seat
Gettin’ it on the dotted line
Got a snake in the bed
Lord, hissin’ on the headboard
Trying to lure you offside

Where the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road
Where the rubber meets the road
Buyer meets Rep then watch it explode
Yes means no means yes means no
Where the rubber meets the road!

Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
With hopes they won’t wind up dead
Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …

It’s Time to Bring Sexy Back to ERP!

ERP, Enterprise Resource Planning, used to be sexy. Designed as an extension of MRP (initially Material Requirements Planning but later Manufacturing Resource Planning), it was designed to automate the back-office functions that did not directly affect customers and the general public and also include product planning, manufacturing control, and distribution in addition to the basic inventory control and production planning capability that was found in the precursor MRP technology.

But that was in the early days back in the nineties when design, manufacturing planning, and distribution planning was still largely paper-based. Then came the noughts with e-business, e-commerce, CRM, SRM, and e-Sourcing. Then ERP became boring old back office software that no one wanted to talk about. If you could afford the new fangled front-end systems, you were a Fortune 500 / Global 3000, you already had ERP, and there wasn’t much to talk about.

But now things have changed. The prices for e-business, e-commerce, CRM, SRM, and e-Sourcing have come down, the mid-market is starting to become saturated with basic “e-” functionality, and the new mid-market manufacturers and distributors need an ERP to take those orders, send those invoices, and manage the inventory they need to produce to meet your JIT inventory requirements. But, until now, they’ve had two choices — either fork out high six-plus figures for a stripped down version of Oracle or SAP (and the expertise to get it installed and integrated) which likely won’t meet all of their needs, or a custom implementation of an open source package such as Compiere, which probably won’t meet all of their needs either (but at least won’t cost them the virtual arm and leg). And neither solution is sexy.

As per SI’s recent post on how Mid-Market Manufacturers and Distributors Need an ERP That Works!, the solution needs to support the needs of the mid-market manufacturer, distributor, and even retailer. These needs include the need to deal with electronic purchase orders from customers, real-time demand planning and order management when customers inquire about availability and ship dates, inventory management, electronic purchase orders to your suppliers, automated invoices from your suppliers, and automated invoices to your customers. Without an ERP that gives them these capabilities, mid-market manufactures and distributors are left in the dark ages.

But if an ERP is to truly be effective, it not only has to provide you with these capabilities, but it has to be easy to use, which would make it appealing, and eliminate a lot of the manual data processing and tactical processes that organizations with traditional ERP systems tend to drown in, which would make it exciting. And if you want to get the new ERP system widely adopted, it should be glamorous, trendy, and even a little bit risqué. And that is the very definition of sexy.

Will ERP be sexy again?