Category Archives: Procurement Damnation

Economic Damnation 9: Oil & Gas Price Shocks

Take a look at the West Texas Intermediate Crude Oil Price chart for the last twenty (20) years over on Macrotrends.net. It’s bouncing up and down like a yo-yo. And any chart you pull up for international oil and natural gas prices is going to look similar. In the chart, we see oil goes from a high of about $38 in 1997 to a low of about $16 in 1998 to a high of about $47 in 2000 to a low of about $26 in 2002 and then a series of gradually increasing perturbations until it reached a high of about $145 in 2008 before it crashed down to about $43 in the same year. And so on.

In other words, within a one year period, prices can double or be cut in half without almost any warning. And either situation can run havoc with your supply chain. Let’s tackle the obvious situation first. Prices double seemingly overnight. Your costs are going up – if not right away, very very soon. 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, they are not going to put up with it anymore, especially if they are struggling financially. They are going to insist upon fuel surcharges, or simply stop honouring your contract and fail to pickup. Now, of course, you can try taking them to court, but in the interim, no shipments, no sales, and screaming customers which cost your organization much more than it could recover in a legal battle years down the road. If you don’t, you are buying on the spot market, paying 10%, 20%, 30% or more than expected for transport, eroding your margins, and possibly even losing on every delivery to your customers if you are working on thin margins to a competitive marketplace. You can either try to pass the costs on, and risk angry customers, or try to ride it out.

The non-obvious situation is when prices drop. Suppliers are the first to cry foul when prices increase rapidly but the last to insist on being fair when the drop. When was the last time they voluntarily dropped a fuel surcharge after fuel prices dropped back to the levels they were when they cut the contract to begin with? Never! You will have to spend a lot of time and effort to negotiate prices down to reasonable levels, and even more time tracking prices to benchmarks to know when you need to start those negotiations — this takes resources, and that costs money. This is a situation where you’re damned if prices rise and you’re damned if prices fall. It’s damnation all around.

And that’s just the short term damnation. If prices drop too much, the first thing the producers are going to do is pump less oil, reduce production, and wait until demand nears (and maybe even exceeds) supply, so that prices will start to rise again. In other words, as soon as you manage to successfully negotiate the price reduction, you’re only a few months away from the supplier coming back with a new surcharge request. The pendulum always swings and knocks you in the head upon every return.

Technological Damnation 84: Dashboards

This is another damnation that should not be unexpected, as the doctor has been proclaiming the dangers and dysfunctions of dashboards since 2007. As per the doctor‘s classic post, a dashboard CAN NOT tell you how well you’re doing. It does not, and can not, know everything your organization is not doing well or how much the lack of efficiency is impacting overall organizational performance. As a result, it can not report on this ever important metric.

As the doctor said in his classic post, the best [a dashboard] can do is capture the data it’s been programmed to capture, roll-up the metrics it’s been programmed to roll up, and do the built in calculations of efficiency based on those roll-ups. Whatever went undefined goes undefined and stays undefined. The best that a dashboard can do is provide an upper bound on how well you’re doing — and this is useless. In particular, a dashboard that says you’re warehouse efficiency is 98% when it is only 92% is useless as it is totally unactionable. (the doctor can tell you that your efficiency is at most 100%, always be correct, and he doesn’t need an overpriced software hack to tell you that!)

And it’s not just the doctor who has this view. About five (5) years ago, Robert D. Austin, author of Measuring and Managing Performance in Organizations, penned an article in Intelligent Enterprise on how “metrics can lead [us] in the wrong direction” which echoed many of the doctor‘s concerns. Mr. Austin states:

“Kaplan and Norton’s cockpit analogy would be accurate if it included a multitude of tiny gremlins controlling wing flaps, fuel flow, and so on of a plane being buffeted by winds and generally struggling against nature, but with the gremlins always controlling information flow back to the cockpit instruments, for fear that the pilot might find gremlin replacements. It would not be surprising if airplanes guided this way occasionally flew into mountains when they seemed to be progressing smoothly toward their destinations.
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It’s as the doctor said. Not only will your staff be lulled into a false sense of security when all of the gages in the dashboard are in the “safe” zone (and not look for the faulty wiring about to spark a devastating explosion), but, and this is especially true if their compensation is based on those numbers, they’ll start to perform dysfunctionally if such behaviour improves the score. For example, many call centres once thought (and some still do) that number of calls processed was a good metric. The result? The reps, who do their best to get you off the phone as soon as possible, don’t take the time to understand the true nature of your problem and instead focus on a “quick fix” to get you going again (even if such a fix, like “reboot”, doesn’t fix the issue and will only result in the problem re-occurring again and again). As a result, not only did the number of calls processed a day increase, but the total number of calls processed by the organization increased, because people have to call multiple times to get their problem solved. Not good. Not good at all.

And while an integrated view is necessary, the doctor was right when he said that integrated dashboards are deadly. Common issues are inconsistent views, propagated errors, and the overconfidence they instill. Despite the fact that they always increase risk, dashboards do not always improve visibility. Unlike a top-of-the-line spend/data analysis tool, dashboards do not give you real intelligence. You should ditch the dashboards before they are your downfall.

Technological Damnation 83: Spreadsheets

Spreadsheets. You can’t run your business off of them. But you still can’t run your business without them. Despite the fact that it’s 2015, and that better, customized, back-office systems exist for every facet of your business, most business still run at least one key aspect of their business on spreadsheets.

This is, literally, the only technology worse to run your business, and supply chain, on than the ERP (which, as we pointed out in a recent post, is a supply chain disaster waiting to happen. Do you have to remind you again that Spreadsheets Will Cost You Billions? That Fidelity lost 2.6 Billion due to a simple spreadsheet error? That 1.13 Billion in Fannie Mae Shareholder Equity went out the window due to an honest spreadsheet mistake?

And do we need to remind you that trying to run a business off of spreadsheets is fraught with peril and could result in your organization tossing 20 Million into the trash on an annual basis? That your new support centre could be woefully understaffed upon switchover? That unavoidable delays will result in your projects as a result of spreadsheet gaps?

You know spreadsheets are a damnation because they still exist, five years after the Harvard Business Review told us why good spreadsheets make bad strategies. There’s just no such thing as good spreedsheets. All spreadsheets of any level of complexity contain errors. The most recent statistic, as reported in Forbes last year in Sorry, Your Spreadsheet Has Errors, 88% contain errors (and the vast majority are human. But what can one expect when one in one hundred keystrokes is erroneous?) And so will 88%+ of spreadsheets going forward as forecasts, models, and financial statements just keep getting more complex.

As long as they exist, spreadsheets will be an eternal damnation that might just burn your business to the ground if the sea of red isn’t detected, due to a human error, until it is too late. If it’s the last thing you do, get rid of them.

The First Four Questions to Ask During Any Mega-Acquisition

A recent guest post over on Spend Matters on “Four Questions to Ask … During Any Mega-Acquisition” was really good. These are becoming all too common and each and every one impacts your organization, often in negative ways.

But the post could have been better. More specifically, the questions could have been more direct.

To make sure that you understand the very important intent behind each of the four questions, SI is going to rephrase them in such a way that there will be no confusion.

1. How will we get screwed over on price?

Every acquisition brings with it the promise of economy of scale and lower price, but it typically takes years to understand overlap, redefine responsibilities and organizational boundaries, and identify staff reductions. And since, in the interim, change management experts, process consultants, and other resources need to be brought on board, overhead goes up and costs go up accordingly.

2. How will we get screwed over on quality of service?

The biggest fish in the combined company gets the best resources. And just because your current organization was a big fish in the old company, that does not mean your company will be a big fish in the merged company. Your company might just be a medium sized fish that gets the “B” Team, if it is lucky.

3. How will we get screwed out of innovation?

Will the merged company continue to develop the platform our company is on or will we remain locked in to a multi-year deal as the technology we bought withers and dies?

4. How will we get screwed in new and interesting ways?

What additional layers of complexity and confusion will the new, combined, legal team try to weasel into the contract and how will that bite your organization in its backside down the road?

Sometimes acquisitions are good, but mega-acquisitions often bring mega-problems and, at least in the short term, don’t’ end up being good for anyone.

Societal Damnation 52: Project Management

I’m sure you’re asking — what’s damning about project management? Isn’t good project management the key to success? After all, without good management, the chances of a project over-running its resource allocation (of time, people, and money), if not failing, increase significantly. Well, yes, it is. Provided you can manage the project.

One has to remember that project management has evolved over the last six decades or so to manage traditional types of projects that produce structures and goods against well-understood designs and project plans, starting with the need to effectively manage complex engineering projects in areas that include construction, defence, aviation, and shipbuilding.

When project management was being defined, the ENIAC was still in operation, Procurement was placing an order against a printed catalogue, and a company imported a small number of commodities in which they had contacts and expertise. There were no complex software projects, no complex Just-in-Time supply chain projects, and no automated factory mega-projects (which resulted in some of the biggest supply chain failures in history).

And, more importantly, projects were focussed on the production, or acquisition, of a single structure, product, or report. They had a defined beginning, a defined end, used well understood resources, required people with well-understood skill-sets, could be scheduled with reasonable certainty, and required a comprehensible amount of money.

Where software development is concerned, there is a rough definition of what is desired, but the beginning and end is a best estimate that is no more accurate than a wild guess in some cases, the resources required (while defined as software architect, developer, network specialist, etc.) are not well understood (as a non-skilled software architect cannot define what makes, or identifies, a good software architect), and the amount of money required is relatively unknown (due to uncertain work effort requirements, unknown support requirements, etc.).

And that’s just software. When it comes to supply chain, the difficulty is intensified. There’s the management of the sourcing, the management of the negotiation and contracting cycle, and the management of the procurement. But before that, there’s identifying the right supplier, which requires detailed understanding of the product technical requirements and the supplier production capabilities. There’s identifying the expected costs, based upon understanding material costs, labour costs, energy costs, tariffs, and overhead. There’s managing the supplier relationship. There’s dealing with disruptions and disasters. And taking corrective actions.

In other words, supply chain projects don’t have well-defined beginnings. Don’t have well-defined endings. Don’t have well-defined workflows. Aren’t limited to a fix set of resources. Don’t always have a well-defined team. And don’t always have a well-known cost (even if there is a target one).

Project Management hasn’t kept up. Sourcerors are often making it up as they go. And they’re damned every step of the way.