Category Archives: Market Intelligence

Procurement Requires MORE Than a Platform

As a result of the M&A frenzy that continued throughout 2018 and recent investments by P&E firms taking majority stakes in a few suite players, every vendor is now all about the “platform” because apparently the “platform” is the ultimate software solution for every Procurement organization.

While it’s true that some vendors are bringing platforms to market with immense value, a platform, in and of itself, has no value. To put it into simple terms, a platform is what you build on … and the best way to think about it is like a construction platform. Without it, you can’t build anything significant … but it doesn’t do you any good, and that’s why the construction company generally takes it away when they are done. The only difference is that a software platform is, in reality, a mix of a foundation (that you build your office building on) and a platform (that is used to finish the walls, etc. on the higher floors).

The reason a platform is important is that, without it, there is no foundation for integrating new modules, integrating third party best-of-breed solutions, or integrating third party data feeds that bring facts and intelligence needed by the organization to make good Sourcing and Procurement decisions.

There’s a reason we asked why is it all about the platform when it should be all about the power last year in the midst of the M&A frenzy. A platform, on its own, does nothing, saves you nothing, but still costs big licensing fees.

Before you jump on the “platform”, make sure it has the “power” that is worth the price-tag. If it’s 100K, there better be 100K of functionality out of the box.

Plus, if it’s a real platform, it should have sufficient do-it-yourself connectivity because, as we have noted many times, no platform excels in everything that is needed to support the S2P cycle and you will have to bolt-on some best of breed solutions and integrate third party data feeds.

Always remember, despite the table pounding and cost-cutting demands, your job is to generate value. There’s only so much cost that can be cut in any category, and once it’s cut, that’s it. So you need something that can identify more value (in value-add services, differentiated/sustainable components the organization can charge a premium for, better reliability, etc.). That takes more than just a “platform”.

How Do You Identify A Truly Stellar Supplier? Part III

Assuming one exists …

Five years ago we first asked this question and a few answers we gave was a stellar supplier was a supplier that

  • actively self manages
  • measures, tracks, and even reports its own performance against SLAs and KPIs
  • accepts — and even helps to identify — the corrective actions it needs to take
  • actively works to not only meet expectations but exceed them
  • communicates as soon as something happens that could threaten a KPI, SLA, commitment, or expectation.

And if multiple suppliers met these requirements, you wanted one that is willing to

  • collaborate
  • jointly identify opportunities for efficiency improvements and cost reductions

But then last year we noted that we missed something important. Most importantly, none of this mattered unless the supplier was willing to

  • open its books
  • expose its supply chain and jointly identify tier 2 risks

But this is not everything that makes a stellar supplier. While its critical that any strategic supplier open its books and expose the risks that affect you, one more thing is critical.

  • platform adoption

If you’re using modern S2P platforms, they all rely on data to deliver their value. And a lot of the data they require is supplier (-related) data that needs to come from the supplier. And since there is no way you can enter all of the data you need from all the suppliers, you need them to use the portal you provide them. You need them to adopt your platform. If they won’t, they are not the stellar supplier you need.

There is No Bright Side to a US-China Trade War

I’ve read a few pieces over the last couple of weeks that some Asian nations expect that a drawn out reciprocal trade war between the U.S. and China could have a bright side for them as they expect that they can lure more manufacturing or agricultural exports their way.

Sounds good in theory, but here are the problems with that theory.

1. A lot of outsourced production over the last two decades has become highly specialized to the point where very few nations have factories with production lines that can produce the goods.

2. The modern electronics industry relies on rare earth metals, and China is the majority producer for many of these — in fact, only a few nations on the planet produce some of these rare earth metals.

3. The only nation that can rival China in agricultural production in Asia is India.

4. A number of companies that need supply assurance have locked in contracts with Chinese (multi-)nationals that can’t be easily broken without penalties.

5. International trade requires logistics infrastructure — good roads, reliable trucking, modern ports, large cargo carriers, etc. Something that not many countries in Asia outside China and India (and to some extent Japan and South Korea) have a lot of.

In other words, there’s not a lot of outsourced production that can be easily switched to other Asian countries, and, most importantly, if China becomes unattractive to the U.S., which we must remember controls about one quarter of global GDP, then

6. Central and South American sources can be just as attractive, and can be easier to source logistically.

Trade wars are never good, and there is no bright side, especially in this trade war.

What Should Drive PE Investment?

The M&A frenzy cycle that we have been discussing on and off for the past year hasn’t really died down, and this has spurred the PE cycle where PE (Private Equity) firms, wanting to capitalize on the frenzy around the Procurement space, are buying (majority investments in) vendors (that appear) ripe for a turn-around or market growth with just a little boost to their platform.

By investing in the right platforms, PE forms are looking to acquire vendors that they can flip (public or private to a bigger PE firm or bigger software vendor) before the M&A frenzy dies down. But just buying any old firm — regardless of how good the turn-around opportunity looks, how good the base technology platform is, or how much the vendor’s platform can be improved with additional investment or roll-up acquisitions — isn’t the answer.

Nor should the vendor follow the same rules that companies should follow when doing M&A. What should a P&E firm look for?

Operations

The firm should either have an efficient operational model or the P&E firm should be able to make the model efficient. If overheads are too high, there should be a way to bring them down quickly — either through new leasing arrangements, new (data center) hosting arrangements, cheaper back-office support operations (using PE personnel or outsourced providers for non-critical operations, etc.).

Talent

Whether the goal is a turn-around, an improved platform, or just taking the platform to a wider market, that’s going to take talent. The majority of the core talent that built the solution and the core talent that can take it to market, sell it, and implement it should still be at the company. Otherwise, it might be a better investment to build something from scratch.

Portfolio Synergy

Whether it’s turnaround or a growth strategy through an improved platform, there typically needs to be results within a few years. The best way to make this happen is if the solution has synergy with the customer base in the rest of the portfolio. For example, if the solution being considered is an indirect sourcing platform but most of the customers in the PE firms stable of companies are direct sourcing manufacturers, the PE firm will have zero advantage in trying to take the solution to market.

Just like M&A vendors should not pursue mergers or acquisitions that get synergy from redundancy, PE firms should not pursue acquisitions that just look cost effective. Only those investments in firms with solid platforms, good talent, efficient operations, and and an attractiveness to the markets they know are worthwhile, as those are the only companies with near-term growth potential — and the only companies the market will want to consider.

Hopefully PE firms will take this advice and save/grow those companies that will help the market as a whole. Only time will tell.

How Do You Find Hidden Costs? Part II

Last year we noted that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them. Sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin. But the margin is only one hidden cost.

There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find the hidden costs. All of them.

In our last post we noted that one way to find hidden costs was to look at production costs, particularly:

  • raw materials
  • energy
  • labour
  • overhead costs

But, as noted in our opening paragraph, there are also hidden costs in the transportation of the goods. And hidden costs in the costs associated in the transportation of the goods — which can include interim storage, dock / port fees, extra tariffs, etc. And what costs are hidden?

  • Fuel Surcharges
    yes, these are valid if there is a contract that allows them, but if the contract is well written, they are supposed to be in line with actual fuel cost increases and decreases above a maximum cost … typically what will happen is suppliers will raise when fuel prices go up, but NOT decrease when they fall back down – that’s unnecessary hidden cost
  • Interim Storage
    some suppliers will use shippers that do a lot of cross-docking, especially with LTL, and some might even temporarily store goods to make sure they only run trucks full – this can incur storage costs and even delivery delays — if the combined costs of this intermediate storage and delay to your supply chain is more than just shipping a LTL truck direct, that’s a hidden cost
  • Dock/Port Fees
    sometimes a supplier or shipper will always blindly use the closest port, even if a port a couple of hundred miles away has half the fees and has carriers that cost less — this is also a hidden cost — remembering that the busy ports are always near capacity, the difference can often make trucking the goods an extra couple of hundred miles a profitable venture
  • Extra Tariffs
    if you are buying from a supplier that has multiple locations in Asia, which one they manufacture in and ship from matters greatly as export tariffs differ by country and import tariffs greatly differ by country; if the right location isn’t chosen based on the destination, these are extra hidden costs as well

Supply chains are fraught with hidden costs, and while it could take a lot of analysis to find out how much they are costing you and whether they are worth dealing with, the reality is that a lot of them are not that hard to find if you just trace what happens from finished good back to raw material.

Happy tracing!