Category Archives: Outsourcing

Denali Delivers

Recently I had the opportunity to sit down and talk with one of the partners and co-founders of Denali (acquired by WNS Procurement) in their new headquarters, one of the few boutique consultancies specializing in supply chain with over ten years of experience in strategic sourcing. I was impressed with what I heard. Although the Denali V4 (Volume-Velocity-Value-Vehicle) “triangle” may not go very far in conveying the value they offer, the customized category framework approach they take to sourcing assignments is one of the best approaches I’ve analyzed from a consulting firm.

Even though they have a very good sourcing cycle (essentially your five-step process), they recognized that successful strategic sourcing is about more than just e-Sourcing – sometimes its about supplier development. If you conducted a well-run strategic sourcing event in the last few years, if market prices have remained relatively stable, and if your suppliers are still delivering quality merchandise, then you might already have the right supply base. In this situation, the best way to increase savings is to develop your suppliers and split the savings. After all, there are costs associated with a sourcing event, both for you and your supplier, and any new supplier is going to factor in their amortized costs of always responding to e-Sourcing events in their price.

In addition to their five-step sourcing processes, they also have a six-step process for supplier development. Furthermore, they embed change management into all of their processes to make sure the results they achieve are implentable, manageable, and sustainable – which is key since negotiated changes don’t hit the bottom line until they become realized savings.

Furthermore, they understand that in order to be successful as a boutique, you need to be able to be profitable off of small engagements, especially with smaller companies. To this end, they only hire experienced, senior sourcing professionals and operate virtually to the greatest extent possible, with sourcing professionals scattered all over the U.S. This allows them to effectively tackle projects with teams as small as two-to-three consultants and service these projects successfully with a relatively local contact point. Furthermore, with a highly experienced staff in e-Sourcing, they can tackle very large projects with under ten professionals, whereas a Big-5 consultancy, bursting with newly minted MBAs, might need thirty professionals to do the same work. And since their virtual model means they don’t spend a lot of money on over-priced office space, their rates are still very competitive.

Furthermore, they’ve progressed beyond just a simple supply chain consultancy to a full-ranged operation that now offers their clients marketing intelligence, training, and staffing services – which means that they can leave your organization in an effective position to follow through and deliver the savings they negotiate after their engagement is over.

Just this year Denali launched their subscription-based service offering, Denali Intelligence, which consists of three levels of Total Sourcing Intelligence market research services specific to sourcing and sourcing professionals. Their category-specific marketing research consists of category market reports, updated semi-annually, monthly market updates for key market indices, and weekly updates that highlight relevant news and events – covering over 150 spend categories across nine different portfolios. They also offer supplier profiles and specialized market research services. All of this is available through their intelligence portal that users of subscribing organizations can log in to whenever they like.

Typical contents of a market report included commodity definition, supply category description & context, category overview & background, demand update, supply base characteristics, key cost drivers, price changes, trends, forecasts, insights, and best practices. More-or-less everything you need to do to augment your sourcing processing with the information you need to develop the right strategy, target the right suppliers, and negotiate the right contract. Some also contain information on industry regulation, risk outlook, and market news, where appropriate. The report I reviewed, on distribution transformers, also analyzed the supply category in the context of Porter’s Five Forces Analysis and included interest rate forecasts.

This Market Intelligence offering is in addition to their SupplyStaff staffing and recruiting services that they use to help their clients hire full time employees and short-term and mid-term contractors as well as augment their staff on a temporary basis for specific projects. Unlike other staffing services, like their consultancy, they only focus on supply chain staffing and this is a big plus for firms who need more than just someone who’s been processing purchase orders for the last twenty years.

All-in-all, they’ve got a great sourcing process and you should definitely consider inviting them to the table next time you are looking to take your sourcing to the next level. They’re just aren’t that many boutiques out there that compete on their level. If you’re in manufacturing, you’ve also got providers like Aptium Global and ThreeCore, if you’re in a services industry, you’ve got the Provade (acquired by Smart ERP Solutions) solution, but if you need help across the board, you just don’t have many choices. I hope to highlight more as the year goes on, but when you consider the relatively small number of experienced senior sourcing professionals and the very large need for these people (whether your company recognizes this need or not), you know there aren’t that many.

Outsource?

Recently, the European Leaders Network published “How fast, how far?”, a summary of a recent European Leaders in Procurement Roundtable in London on Procurement Outsourcing. If done right, outsourcing can lead to great results, but if done wrong, it can lead to nothing but headaches and failure.

The report contained a number of tips and insights that are worth summarizing.

  • The key to successful outsourcing lies in the preparation.
  • Strategic Sourcing is a key benefit driver and one should select an outsourcing provider with the competency.
  • A good procurement outsourcing provider should provide you with financial value on a discounted cash flow basis – you should see savings very quickly.
  • Ruling out parts of the procurement process for outsourcing could prove counterproductive.
  • Before trying to outsource or optimize a process, make sure you understand how it fits into the larger business process.
  • There are not a lot of procurement outsourcing specialty providers in the marketplace. Thus, the best way to select a provider is to identify a small number of providers who could be right for your organization and collaboratively arrive at a proposal – then select the best mutually beneficial deal.
  • Technology is simply an enabler – effective delivery is the key.
  • A contract should include well thought-out and clear strategies for ending a relationship if it should prove necessary.

In addition, SupplyManagement.com asked the eternal question, “To outsource or not to outsource?”. which summarized trends and the basic outsourcing models of basic proposition, access to expertise, focus on core, and no role.

The article noted that outsourcing projects are not easy, communication with cross-functional teams may be a challenge, and trust could become a barrier. Furthermore, it noted that procurement outsourcing organizations are likely to be judged against tighter savings definitions, which leads to more challenging savings targets, which in turn can drive different behaviors. (Which may or may not be a good thing. Another reason why it’s important to mutually collaborate on the relationship definition.)

For reference, the models that it presented are:

  • Basic Proposition Traditional, cost-focused tactical procurement outsourcing.
  • Access to Expertise Traditional procurement outsourcing for reasons over and above the basic proposition of cost.
  • Focus on Core Strategically mature procurement department that wishes to outsource certain elements of its operation to focus on core competence.
  • No Role A strategically mature procurement department outsourcing elements of its operation that are in fact core competencies of its operations. In this situation, a company is unlikely to gain anything from procurement outsourcing.

Innovation is Relative

A recent CRM Today article, which quoted Gartner, noted that “Emerging Markets are Increasingly Driving Global Innovation”, that developing nations are adopting innovation and technology faster than mature markets, and that China and India are innovating at a faster rate than ever before. But the title misleads one about the truth, which becomes somewhat clearer in the article, that this innovation is relative to their current state of development.

For example, the article notes that in highly constrained environments, which might include poor infrastructure and low affordability, there is an acute need for products that can serve the local market better, rather than products designed for the developed world. For example, mobile phones which require less power and have built-in connectivity, are more suitable for emerging markets than PCs. They are also cheaper than PCs and more adaptable to the emerging market environment. Gartner predicts that mobile phones will outnumber PCs by a factor of 15:1 in developing markets by 2010.

Furthermore, even though China and India have the ambition to lead the IT industry in the global market, as the article notes, India is still lacking in infrastructure and China still has huge cultural barriers to overcome. As I noted in Can China Be Innovative?, a huge obstacle is the nature of China’s educational system, which stresses conformity and does little to foster independent thinking. This is also a country where new product development is equated equal to copying something someone else does, but doing it slightly cheaper and / or using a new color. Furthermore, as I pointed out in Is Low Cost Country Sourcing to China Really Innovative?, even though media reports in 2004 indicated that China produced 600,000 engineers compared to the 70,000 produced by the United States, more than 290,000 of the Chinese degrees were subbaccalaureate and studies by organizations such as the McKinsey Global Institute have indicated that multinationals find that less then 25 percent of the graduates are employable which indicates that the number of employable graduating engineers in China from a multinational perspective is roughly equal to the number of employable graduating engineers in the U.S.

So even though I can understand Gartner’s prediction that by 2015, IT engineered for developing economies will drive 20 percent of disruptive IT innovation worldwide, I will only agree if innovation is taken in a context relative to the local economy. In other words, I think China, India, and other developing nations, with their huge appetite, will increase their rate of innovation, to the point where they may even exceed the rate of North American and European innovation, but that innovation will be relative to where they are today and that, as such, they can not be banked on as sources of innovation for our developed economies. Not to say that they won’t stumble on a few breakthroughs along the way that will really help us out, just that I wouldn’t bank on it.

Low Cost Country Sourcing 2007

Back in March, EyeForProcurement released its 2007 “Sourcing in Low-Cost Countries Report” that surveryed 185 procurement professionals from manufacturers, retailers, and 3PLs across Asia, North America, and Europe. The report found that 41% of respondents have been Low-Cost Country Sourcing for more than five years and 57% for over three years, which is good, but that 54% of respondents gave lower labour costs as a primary reason while 43% gave lower material costs as a primary reason, which is bad.

The rate of wage inflation in many countries commonly considered Low Cost Countries, including China and India, is rising rapidly, and over 10% in some of these countries, and material costs are going up across the board, especially in some of these “low-cost” countries which are scrambling to build up their infrastructure and offerings on the global market. Just see Tim Minahan’s recent post that notes that “Inflation Woes to Get Worse” on Supply Excellence [WayBackMachine]. As far as I’m concerned, only the 27% that gave shorter distances to final customer’s markets and maybe some of the 21% that gave other get what low-cost country sourcing should be about.

The major countries and regions were, as expected, China (which is utilized by 76% of respondents), other countries in Asia (which are utilized by 53% of respondents), and India (which is utilized by 33% of respondents).

It was nice to see that 36% of respondents indicated that logistics cost was a major element of total cost, almost as many respondents that indicated materials cost was a major cost element (42%) and close to the number of respondents that indicated labour cost was a major cost element (48%).

It was also nice to see that three of the four largest obstacles listed were trade regulations, customs & tariffs, increasing complexity of transport & logistics operations, and government regulations, clearly indicating that global sourcing to “low cost” countries is complex.

For those interested in Low Cost Country Sourcing, I’d like to remind you that EyeForProcurements 2nd “Low Cost Country Sourcing” Conference takes place August 29-30, 2007 in Chicago. Early bird registration, which is accompanied by a $400 discount, expires this Friday, June 15, so if you’re interested, and not registered yet, I’d recommend you do so quickly. (There’s a good chance The Doctor will be there, but, given that it’s in Chicago, I’d say you can almost count on The Prophet [of Spend Matters] being in attendance.)

the doctor’s Guest Posts: The Year in Review

Over the past year, I’ve blogged a number of guest posts over on eSourcing Forum, including forty posts last summer as part of the weekend series. For new(er) readers to the blog, here is a list of all guest posts over on eSourcing Forum with direct links.

Weekend Series Posts on e-Sourcing Forum [WayBackMachine]

Purchasing Innovation I: An Introduction
Purchasing Innovation II: TRIZ
Purchasing Innovation III: The Verifier Approach
Purchasing Innovation IV: Innovation Continued
Purchasing Innovation V: Sourcing the New Organization
Purchasing Innovation VI: CrowdSourcing
Purchasing Innovation VII: The Road Ahead
Purchasing Innovation VIII: Transforming New Product Development
Purchasing Innovation IX: The Purchasing Evolution!

On Demand I: The Good
On Demand II: The Not-So-Bad
On Demand III: And the Coming Pretty …

Cost Reduction and Avoidance I: An Introduction
Cost Reduction and Avoidance II: Metrics
Cost Reduction and Avoidance III: Incentivize for Success!

Supply Risk Management I: An Introduction
Supply Risk Management II: Risks and the Need for Resilience
Supply Risk Management III: Managing Risk

Supplier Performance Management I: An Introduction
Supplier Performance Management II: The Road to Success
Supplier Performance Management III: Best Practices

Demand Driven Supply I: An Introduction
Demand Driven Supply II: Stages and Implications
Demand Driven Supply III: Challenges and Implementation

Center Led Procurement I: An Introduction
Center Led Procurement II: A Center of Excellence
Center Led Procurement III: Best Practices

Procurement Outsourcing I: Is it right for you?
Procurement Outsourcing II: Selecting a PSP
Procurement Outsourcing III: Getting the most out of your PSP

Optimization I: A Powerful Tool
Optimization II: Why it was Relegated to the Shadows
Optimization III: Why it’s time is finally here
Optimization IV: POE or BoB?

Six Sigma I: An Introduction
Six Sigma II: Innovative Quality
Six Sigma III: Value Based Strategic Sourcing

Weekend Series Wrap Up I: Process and Technology
Weekend Series Wrap Up II: Supply Chain Management
Weekend Series Wrap Up III: The Innovation Revolution

Miscellaneous Posts on e-Sourcing Forum [WayBackMachine]

* Lead Time Optimization: Groundbreaking New Technology or just Applied Total Value Management-based Decision Optimization in Disguise?
* Sustained Sourcing Success
* Are there any limits to procurement’s role?
* Outsourcing Gets Tough
* Design for Supply
* The Benefits of an End-to-End e-Sourcing Suite
* Accelerating Value with On-Demand: An Aberdeen Perspective
* Supplier Enablement Enables Savings

And just in case you missed it, here’s a link to the chaos-causing post on Emptoris’ optimization over on Spend Matters:
The Doc’s Perspective on Emptoris’ Optimization*

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.