Category Archives: Procurement Damnation

Technological Damnation #77 e-Currency

We started out our series with the Economic Damnation of Currency Strength, which, thanks to the recent unexpected fluctuations in certain global currencies, probably has you shaking in your boots. But if you think trying to manage real currency exchange is bad, just wait until you have to start using non-country based e-Currency, like Bitcoin.

Bitcoin, a peer-to-peer payment system released as open source software in 2009, allows users to transact without using an intermediary using a decentralized virtual currency (or crypto currency) which has a value defined by the global market based on the fact that it’s limited and once all of it has been “mined”, there are no more units. Because of its structure, new units cannot be issued on a whim (whereas a country can print as much money as it wants, at the risk of hyperinflation), and, as a result, it’s value can, and has, skyrocket(ed) over night.

For example, up until late 2013, Bitcoin’s value was negligible, at which point it skyrocketed to a value of over one hundred. It stayed there for almost a year until early 2014 when it skyrocketed up to a value of almost 1200, before, over the last year, crashing back down to about 200 (in US dollars). On January 18, 2013 it’s value was 15.70. On April 9, 2013 it was $230. On April 16, 2013 it was 68.36. On May 4, 2013 it stabilized around 112.90. It stayed there until around October 15 when it began to skyrocket to 1,147.25 on December 4, 2013 then it crashed back to 522.23 on December 18, 2013 returned to 940.10 on January 5, 2014 and since then has been on a downward fall until January 18, 2015 when it was 199.56.

As virtual / crypto currency is still in its infancy, shocks like this can be expected and can be much more devastating than the recent drop in the Ruble. And, even worse, now that many vendors are starting to accept crypto currency as payment from global consumers that trust the currency, they will be expecting to pay with the currency as well. And your organization will have to hedge against new crypto currencies, which might also include Litecoin and Darkcoin (as well as a dozen others), as well as existing currencies. The fun is just beginning.

Authoritative Damnation #64 Major Activist Investors

An activist investor is technically defined as an individual or group that purchases a large number of a company’s shares and/or tries to obtain seats on the company’s board with the intent of effecting a major change in the company. A (public) company can become a target for an activist investor if it is mismanaged, has an excess cost structure, or is not capitalizing on its value.

And while one might be tempted to think that an activist investor is only bad news for Procurement if the company has excessive costs, that’s not the case. An activist investor is always bad news. It might be the C-Suite that is overspending (on private jets and tropical locales for “strategy meeting” getaways), it might be Sales and Marketing doing a lousy job, and it might be R&D failing to focus on the right products, but the first thing the activist investor will want is a balancing of the books — and that always, always, always starts with a focus on cost reduction across the board. Procurement could be in the top tier of spend management in its vertical or industry group, with an average spend that is 5% less than the industry average benchmark, but the activist investor will still demand that the organization pursue an across the board cost reduction at least in the 5% to 15% range — a reduction that will not be possible in many of the categories currently under management.

Plus, additional opportunities will likely only be available if Procurement is able to get more categories under management — which could be difficult even with Board Support as many departments, fearful of cuts that almost always occur when activist investors sway the Board, will not want to give up budget, authority, or supplier relationships for fear of becoming unnecessary. This will make it very hard for Procurement to deliver against unreasonable demands and increase the chances that they end up under-performing on the activist investor’s scorecard and end up looking bad when they are actually the top performing department in the organization.

(And we haven’t even mentioned the expectations that will be levied if Procurement is expected to play a key role in a merger or acquisition that an activist investor, investing in multiple organizations, is trying to engineer between it’s investments — because that’s a damnation in its own right that will be discussed at a later time.)

So what can you do? Baseline, Benchmark, Model, and Expose. Specifically:

  • Baseline
    Baseline actual costs for commodity groups and categories under management.
  • Benchmark
    Benchmark against publicly available rates and obtainable GPO rates to prove that performance is good and that any additional cost comes with a value add (in the form of quality, marketing, service, additional functionality, etc.)
  • Model
    Build should cost models that justify the validity of the baselines and/or benchmarks under current market conditions.
  • Expose
    Expose the overspending in categories not under Procurement’s control using baselines, benchmarks, and should-cost models and divert the attention of the activist investor elsewhere.

Organizational Damnation #58 Logistics

Logistics should be Procurement’s best friend, but if Logistics is a separate organization, Logistics can be one of Procurement’s worst enemies. This is because while Procurement believes that it’s job is to negotiate the best overall deal, including transportation, Logistics believes transportation is it’s business, and Procurement should just stick to unit price or landed cost from overseas suppliers and let Logistics use it’s relationships to get the best deal.

And while this sounds like a reasonable division of labour, there are a few issues with this arrangement.

  1. The best deal is not always on a purchase level.
  2. The best deal can not always be negotiated by Logistics that have long-term relationships with incumbent carriers.
  3. The best deal can often be improved by atypical routes.

What do we mean by this?

1. If Logistics is in charge, they will obtain “best rates” from current carriers for Procurement for regular routes. But these will be based on current contracts, not new contracts — and if the contracts were not obtained competitively, it won’t be the best rate.

2. if Logistics is in charge, they will look at preferred suppliers for “best rates”, and not go out to bid until it is time to renew the global standing offer contracts, bid sheets which will often be sent only to “preferred” suppliers only — sometimes new suppliers, especially in restricted geographies, will have the best rates.

3. If Logistics is in charge, they will typically look at a fixed set of typical routes — not atypical routes from nearby airpots, nearby ports, or nearby dockyards. It may require a few more miles on a truck, but if the airport fees from a secondary airport are half that of the major airport, it might be worth it.

Plus, the best deals are often negotiated when Procurement can put out a tender that groups nearby lanes on unrelated bids, they can often get better rate sheets for Logistics than Logistics can, especially since Procurement is often impartial and not managing the relationships day-to-day.

But if Procurement tries to use its ability to get Logistics a better deal, Logistics will feel that it’s rights are being trampled on and might do everything it can to get in the way. It will try to prevent tenders, feed backdoor information to preferred carriers, and spread rumours that your actions will damage relationships and increase prices.

What can you do? There are only two options.

Either Procurement manages to convince Logistics to use its processes and best practices to source transportation bids and get the best rates or it manages to convince the C-Suite that Logistics should be under its purview and that the two departments should be merged into one under the CPO.

Societal Damnation #38: The Sharing Economy

Sharing is a good thing? Right? Isn’t that what we’re all taught when we are young?

Well, yes, unless you are the one who isn’t being shared with, or the one who refuses to share. And if you are the one who refuses to share, you may find that not only are you without partners, but without means as well.

As covered in our recent series on the “Future” of Procurement in our first Shiny New Shoes post, The Sharing Economy is one of the few true future trends of the space. And while it’s a breath of fresh air to one who is constantly inundated with futurist drivel, to the average Procurement Professional that is still trying to come to turns with the foundational values of strategic sourcing and the collaboration it requires with core suppliers, it’s downright scary. So scary, in fact, that it can be considered the next in a wave of plagues to descend upon an average Procurement department, still struggling to replace the fax machine with a web-enabled e-Sourcing Solution.

While this sharing economy is currently in the domain of individuals like you and I, and a handful of small businesses who have latched on, this share economy is going to migrate to medium sized businesses en-masse and, when properly utilized, give these businesses access to the latest and greatest technology and economies of scale that these medium-sized businesses will be unable to acquire on their own. Can’t afford to buy that new automation and production system that increases throughput, improves quality, and decreases natural resource consumption? No problem. Form a cooperative with quasi-competitors, build a new factory with the new production technology, and effectively time-share it (for the operating cost). This will put medium-sized businesses on the same playing field as large enterprises and level the playing field in ways that have not yet been thought of. The hippies succeeded and their ideas changed the world — 50 years later.

But it might not be a world your organization gets to conduct business in if it cannot accept, embrace, and form the new reality to its advantage. How will it do this? It will start by identifying opportunities that it cannot achieve on its own. Then it will have to identify what partners it would need to bring those opportunities within its grasp. Finally, it will need to put together a plan to unite those partners and execute it to completion.

This may sound easy, but adopting the necessary mindset, convincing others inside and outside of the company, and then working together across organizations as a team while each member collectively fights on behalf of their respective organization for what they perceive their share of the market to be will not be easy. It will be challenging, but the persistent will prevail. It’s just one labour. Hercules had twelve.

Geopolitical Damnation #31: China and the New Silk Road

China is arguably, and simultaneously, the world’s oldest culture and the world’s newest mega-economy and super-power. Not only does China have the 2nd largest GDP in the world, but it is one of only 4 countries that are net international creditors (the other three being Norway, Luxumbourg, and Switzerland). In comparison, the US, with the largest GDP (of slightly less than 18 Trillion), has an external debt that is roughly 18 Trillion. (In other words, it’s debt now exceeds its annual GDP!)

It’s also the world’s most populous country with 1.35 Billion people and the second largest country by land area. It has the world’s third longest river, 14,500 kilometers (or 9,000 miles) of coast lines, approximately 130 ports open to foreign ships, over 11,000 kilometers (or 6,800 miles) of rail, and over 180 commercial airports. It’s rail network and ships transport a significant percentage of the world’s global trade and traffic is still increasing annually.

China is no longer the emerging economy of the 80s and 90s that you outsourced to and imported from — now it is the emergent economy that is outsourcing to Brazil (to serve the North American Market, consider Foxconn) and Africa (to serve the European market). And, for most multi-nationals, it’s their newest, and most promising (and potentially most profitable) market. China already has over 220 billionaires, and this number increases annually. (The US has 442.)

And as a result, China is turning the traditional sourcing world topsy-turvy — especially now that the New Silk Road (China’s Grand Strategy has been operational for eight weeks. (Source: UNZ) As described in the UNZ article, and on SI last fall (in What Impact Will The New Silk Road Have on Global Trade?, for e.g.), this 13,000 km railroad that crosses China from East to West and then Kazakhstan, Russia, Belarus, Poland, Germany, France, and finally Spain enables trade across most of Eurasia. And when the high-speed rail is complete, transport from China to Europe will take even less time than it does now. And China, which is home to 7 of the world’s top 10 container ports and which serves up air cargo that represents more than one-third of global trade value (even though only 1% by weight), will control even more of global trade then it does now! While also being your biggest customer.

You can’t deal with China in the old way anymore. Gone are the days when they were the low cost provider that needed your business. Gone are the days when you could fall back on Mexico. And gone are the days when you never needed to worry about the China market. Now they are a lower cost provider, due to their increases in efficiency (just like Japan increased in efficiency after WWII), but they don’t need your business. They have money and they have the world to sell you. Because Mexico was almost abandoned for China, there are few factories left that can produce modern electronics and none that can produce the volume to equal a Foxconn. And with most markets stagnant, China is one of your few opportunities for growth. Moreover, the supplier you are negotiating with to produce your cell phones for Engineering might be the same supplier your sales team is negotiating with to buy IT’s new mobile factory management software suite.

In other words, when China is across the table, they are not a vendor or supplier that can be beaten down with old-school hard-ball negotiation (even if they historically put melamine in the milk, lead in the paint, and who knows what in the pet food) — they are a partner, and equal, and must be approached as such. Even if you never sell to them, you might sell to one of their partners, and they talk just like we do. This doesn’t mean that you shouldn’t be determined in your negotiations — as you should always fight for the best deal — but be fair, realistic, and base your demands on fact and should-cost models, not empty threats or baseless demands for unreasonable cost reductions.

China is about to become your upstream as well as your downstream supply chain. You have to abandon your old view of the world, accept this reality, and start preparing for it. It doesn’t have to be the damnation that causes your undoing. It can be your salvation. Your choice.