Category Archives: rants

What’s the Real Reason for the Driver Shortage?

SI has regularly blogged about the driver shortage and the dire predictions that the shortage in the US alone could top 100,000 drivers in a few years. (See this classic post on how new estimates put the driver shortage at 240K drivers, for example.)

A lot of reasons have been given for this including, but not limited to:

  • low wages
    truck drivers make an average wage over 4K less than per capita income and 13K less than median household income
  • poor working conditions
    truck drivers often have to be behind the wheel up to 14 hours a day (sometimes sitting in traffic or in lines to load/unload for over half of that), six days a week, and they don’t often get to eat well
  • poor healthcare
    as they have the worst plans possible, can’t keep regular appointments, and can’t always see a doctor on the road
  • danger
    not only do truck drivers often have to sleep in their cabs in unsafe conditions, risk getting robbed on the road, but 12% of all work-related deaths in the US are from truck drivers in auto accidents

But is the real reason that we have a driver shortage perception and stereotypes? When you get down to it, almost 95% of truck drivers are men. Even though the stereotype of the driver as a brawny, macho man dressed in a lumberjack shirt has fallen by the wayside, driving is still very much a man’s world. And even if the majority of drivers are not perpetuating the man’s world stereotype, they certainly aren’t doing anything to counter it. Consider this article over on the BBC from late fall that asked Why Don’t Women Become Truckers?

All over the world it’s the same – a woman driving a lorry gets funny looks and has to listen to unfunny jokes.

How are we ever going to solve the driver shortage if 51% of the population doesn’t want the job?

In other words, the real reason for the driver shortage may be the industry’s own fault.

First Clue that the New Public Procurement Policy is Going to Cost Everyone Money

Effective immediately, our policy is to only buy “Made in X”, where “X” is the local country or state.

Why is this going to cost you money?

First of all, it’s going to eliminate competition. And we all know what happens when competition goes away. Suppliers, who know they don’t have to worry about being replaced, as there’s only a few alternatives, and they’re already in your door, stop working as hard to be as cost competitive, innovative, or valuable to your organization.

But if that was the worst that could happen, it wouldn’t be so bad.

The reality is that as soon as a “buy local” policy comes into effect, suppliers are going to also (pretend to) “buy local”, which of course is going to raise their costs, because their suppliers are going to also stop working as hard to be as cost competitive, valuable, or innovative because the market is small, they’re in the door, and they know their competitors will also be content to maintain the status quo so they won’t have much competition. And this will continue down to the raw material supplier.

But if this was the worst that could happen, it still wouldn’t be so bad.

The reality is that once a supplier knows that it’s effectively the only game in town, it’s not going to worry about cost increases. In fact, it’s not only going to stop asking how much it has to raise costs to cover its increased costs and ensure it maintains nice, fat margins, it’s going to ask how much it can raise prices and just how fat its margins can get. It’s borderline corruption.

But if this was the worst that could happen, it might still be something that could be grudgingly accepted and dealt with.

The reality is that not all suppliers will be content to inflate their margins. In locales where corruption is common, this is only going to encourage more corruption. As per the public defender‘s post on how “Made in Nigeria” Public Procurement Policy Will Simply Lead To More Corruption, this sort of policy provides the perfect cover for both parties in a typical corrupt procurement transaction. How so? Read the public defender‘s post. Simply put, the buyer can now get away with saying “I had to buy local, and this looked like the best choice” and use it as a defence when caught.

How to Save a Whopping £500 on 1.0M of Spend!

Unless you are a best-in-class purchasing organization (and that is not the case for 92% of you), then you need to save. Budgets are shrinking. Costs are rising. Growth and consumer spend is flatlining. And if you don’t get your costs under control, you will be out of a job one way or the other.

But there’s a right way to save, and a wrong way to save.

The right way to save is to apply advanced analytics and optimization across your strategic and high spend categories which has proven time and time again to save an average of 10% across the board year after year when properly applied.

The right way to save is to influence and control demand. The only time demand should increase year over year is when it is for products or components that are for sale, or go into for sale products, and sales for those products are increasing. Demand should not increase more than x% for office supplies or MRO where x% is the increase in workforce, and, in fact, in many categories, should be decreasing year over year. For example, paper spend should decrease (since so much can be distributed online). MRO should decrease, as better inventory management and higher quality parts should decrease the number of products required. Etc.

The right way to save is to increase the value of the product sourced without increasing the price, so that even if costs stay constant, value increases and allow for an increased revenue stream.

So what’s the wrong way to save? Capital manipulation. In particular, earlier customer payment and later supplier payment.

The majority of analysts, accountants, and consultants, especially the unenlightened ones, will dazzle you with calculations that show how if you decrease accounts receivable from 30 days to 15 days and extend accounts payable from 30 days to 60 days, the extra 45 days of working capital you have will save you a fortune as you’ll either have to borrow less or can invest more and generate a huge savings on every Million that stays in your coffers an extra 30 to 60 days.

For example, if you have an annual cost of capital of 6% and you typically have to borrow 50% of required working capital to pay your suppliers on a timely basis, you will be paying:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  5,000 10,000 10,000 20,000
10 M  50,000 100,000 100,000 200,000
50 M   250,000   500,000   500,000 1,000,000

And as soon as a CFO at a mid-size company believes that if he can squeak out an extra 60 days across 50 Million of expenditure at 6%, he can save £500,000, a blind mandate to delay payment terms and expedite payment collection goes out across the board. And then CFO pats himself on the back and goes on a well deserved corporate retreat to the next conference he can find at a mountain resort.

But what actually happens?

If you do the proper calculation, you see that very little is actually saved because the savings is on the cost of capital for the payment days of the amount, NOT cost of capital for the payment amount. Which is a much smaller number. If you do this calculation, the real numbers are:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  500 1,000 1,000 2,000
10 M  5000 10,000 10,000 20,000
50 M   25,000   50,000   50,000 100,000

Remember, in the long run, the payments still have to be made and, most importantly, still have to be made on a monthly basis. So while you might see a savings the first month, there will be no further savings because all you have done is shifted all payments ahead by x days. A payment delayed is not a payment negated.

Moreover, all you’ve really accomplished is p!ss!ng off the supplier. And any chance of being a customer of choice has been thrown under the bus, where you effectively threw the supplier, who now has to borrow more capital to stay in operation, often at a rate double yours. In other words, the whopping £5K you saved likely cost the supplier £10K and, at the end of the contract, the first thing they are going to do is increase their costs substantially to cover their loss. So, at the end of the day, your short term savings of £5K is likely going to cost you £15K or more (especially when you consider the value associated with being a customer of choice). But hey, the CFO is always right, right? Wrong!

Don’t believe the doctor? Check out the public defender‘s blog that goes through this calculation in even more detail.

AI Will Not Save Procurement — Thought Leaders Will

In yesterday’s post we pointed out that despite strong claims to the contrary, AI will not save Procurement (and, if hastily applied, will only hasten its demise). Procurement is at a crossroads, but the last thing it should do is sell its soul to the demon that spawned modern AI.

As the public defender pointed out in a recent co-authored piece on The Future of Procurement, courtesy of Trade Extensions, Procurement will survive, as long as it redefines its role to meet the needs of the new enterprise.

As highlighted by the public defender, Procurement will, among other roles, be the organization that

  • brings to the table an understanding of what markets and suppliers can offer to support the strategic direction of the business
  • brings to the table an understanding of what platforms will best support the organization’s business, not just the day-to-day sourcing and procurement solutions
  • brings to the table the deep expert market research and negotiation skills that are required to not only secure supply but transportation, talent for operations, and good customer relationships
  • brings to the table the value engine that increases organizational efficiency and effectiveness and innovation that takes the organization to the next level

But it will do more than that. It will be the department that helps set the strategic priorities for the organization. It will be the department that defines the best strategy for talent acquisition and management. It will be the department that will define not only where the organization fits in the supply chain, but how the supply chain will run to support the organization. It will be the new nerve centre of the enterprise, created by the thought-leaders of tomorrow.

AI Will not Save Procurement … It Will Only Hasten its Demise

A recent post over on Spend Matters UK from Andrew Nichols in “artificial intelligence help businesses save thousands” boldly states that Artificial Intelligence Can Help Procurement Solve Some of the Big Challenges. In fact, he predicts that AI in the not so distant future will play a major role in the international supply chain, supporting businesses to solve a number of very contemporary problems.

In particular, Andrew believes that AI could identify new markets, manage supply chain risks, track exchange rate volatility, and find the best value without compromise on quality.

If this were true, Procurement would not be needed at all, and the C-Suite would be chanting “Procurement is Dead. Long Live the Machine! Our Samaritan has Arrived!” If an AI (which does NOT exist by the way, intelligence is not artificial) could do that, you’d all be fired, because, let’s face it, when it comes to managing supply chain risks, tracking exchange rates, identifying new markets, and always finding the best value, your batting average is less than that of a major league baseball pro.

An AI can give you market statistics, and break it down by region, demographic, competitor, and product. It can NOT tell you how appropriate a market is for you. You have no idea why a market is good for a competitor. You can cross-correlate it’s products to other top selling products on the market and identify common features, common advertising channels, and common comments across brand surveys, but the best you can draw is conclusion based on correlations. Correlation is not causation. You could take the highest ranked strategy suggestion from the analytics engine, implement it, and flop miserably because a key factor was missed, flawing the entire model.

An AI can compute, for every product in the world, the cost to value ranking using market costs, exchange rates, correlation to desired feature lists, and consumer ratings, but this is not the best value. The best value is that where the cost to value formula is based on your value rankings, which could be much more heavily dependent on reliability, safety, and service than look, feel, and flash. And since your organization will not have every product rated, the best the AI can do is suggest the most likely candidates for human review.

An AI can detect the presence of risk indicators that you have defined against known risks, it cannot identify risk indicators for unknown risks. If the algorithm doesn’t understand that a tsunami is a risk because it can damage harbours and destroy coastal plants, the risk will not be identified until it discovers a news story about how the supplier plant had to shut down. And if it does not understand that legal proceedings can bankrupt a small company, it could overlook a filing with the potential to bankrupt the supplier. If the supplier was strategic, that is something the organization would want to know about immediately.

An AI can track exchange rate and give you a real-time view into which is the most preferable rate, the short-term and likely long-term trends, and give you suggestions with an expected level of confidence within plus/minus x%, but can not necessarily predict the right currency to use to lock in a long term value for any better than a human expert. No known algorithm knows all the factors that contribute to exchange rates, how to detect their presence, and how to incorporate them. There are a lot of advanced statistical algorithms that can model the trend curves well, but they assume that markets will more or less keep the status quo, which never happens. Their projections are useful, as they can identify which currencies are likely to be best and where inflection points are likely to occur, making the best use of an experts time, but they cannot replace the expert.

And if any CPO were to try and replace a team with an AI for one or more of these functions, then he would quickly bring an end to Procurement in his organization because, while it would succeed in many cases, sooner or later there would be a spectacular failure that would cancel out all of the previously identified value, putting the entire organization at risk.