Category Archives: Sourcing Innovation

(Supply Chain) Initiative Cost Justification

Last year, over on the e-Sourcing Wiki, I brought you The Quest For Purchasing Fire, a guide on how to develop the internal strategies for selling the procurement tools internally. This process had two key steps that, if not done properly, could be major stumbling blocks in getting your initiative off the ground. These key steps were defining the value proposition and building the business case.

The fact of the matter is, when you get right down to it, often the biggest stumbling block is to secure funding for your initiative. Unless the project happens to be a pet project of the CEO or CFO, chances are you won’t be able to secure funding unless you have a clearly stated and easily understood kick-ass value proposition and a well-researched and documented business case to back it up — preferably one that shows big dollar signs to the company’s favor. Thus, it’s important to zero in on the cost-justification in both of these steps and reduce the decision to one that should be a no-brainer ( especially since we know that, in some companies, it would appear that having a functioning brain is not a requirement for an executive position ). If your CEO and CFO can see a significant ROI, which includes an ROI in the near-term, which they know makes Wall Street and / or the private investors happy, they’re much more likely to find the money you need “in the budget” than if they don’t see a savings opportunity that will make them look good.

That’s why it was nice to see an article last month over on the Supply Chain Digest site that offered up “six steps to improved cost justification for supply chain and logistics initiatives”. Simply put, when it comes to understanding the best way to put together a cost justification for your project, you can use all the good, free, advice that you can find.

The article offered up six useful guidelines to consider when putting together your value proposition and proposal. At a high level, these guidelines were:

  • Understand your company’s investment analysis model
    What does your CFO care about? IRR (Internal Rate of Return), PP (Payback Period), NPV (Net Present Value), ROIC (Return on Invested Capital), etc? Make sure to use the measures your CFO is comfortable with and wants to see. It will help insure that your proposal makes it to the top of his pile.
  • Link funding requests to key corporate strategies and objectives.
    The CEO wants to further the corporate strategies and objectives outlined by the Board, because, simply put, his success in that area positively impacts his annual review, and bonus. Talk to those strategies. That will make sure your initiative gets his attention.
  • Develop a Strong Summary with a Detailed Back-Up
    Your CEO is busy. Very busy. Probably doing stuff that’s not all that important (but that’s not entirely his fault – boards and wall street like to waste an executive’s time), but stuff that consumes his or her time nonetheless. Therefore, it’s important that you have a strong, straight-to the-point, executive summary that says why the company should do this, and what results it will have … because that’s all he or she might have time to read. However, if your CEO likes what she hears, he or she will ask the CFO or another member of the management team to “dive into it” which is where the detailed calculations and supporting materials come into play.
  • Use the Numbers to tell a story.
    Remember, the CFO likes numbers. So base the story around those numbers. “We will generate a 300% ROI by implementing an e-Procurement system that … “.
  • Review Preliminary Justification with Key Stakeholders
    And make sure to to have them verify every assumption that you make. The last thing you want is for the manager tasked with verifying your submission to find that one of your key assumptions is wrong. Even if the affect is minor on the final ROI calculation, being overworked, he’ll likely assume that the whole plan must be faulty, throw it out, and vote nay without even giving you a chance to correct it. But if you meet with the key stakeholders and everyone agrees, you can get it more-or-less right the first time and not have to worry about your initiative getting killed off before it even has time to begin.
  • Triple Check to Eliminate Math Errors and Risky Assumptions
    A CFO is likely to assume that if you can’t add, since you have a spreadsheet to do it for you, you probably can’t do anything else you say you can do either, and deny your project without even considering it. And CEO’s don’t like risk, so if you can get (almost) the same results with less risky assumptions, you should use them.

Good advice all around.

A Sourcing Advisory Checklist

Sometimes a sourcing advisory firm can save you untold millions, and sometimes, as in the recent cock-up exposed by Jason Busch over on Spend Matters, the engagement will lead to a total disaster. So how do you make sure you’re the superstar who brokered the agreement that saved your firms millions of dollars and not the fall-guy who takes the blame for a multi-million dollar cock-up? You manage the process from end-to-end, and you start by making sure you have the right firm as an advisory partner. What should you look for when searching for the partner who will help you succeed when others have failed? Although the specifics will depend upon your needs and the sourcing projects in hand, the following checklist, first put forth by Phillip Fersht, blogmaster of Horses for Sources, in this Global Services article is a great start!

  • Internal Knowledge Management
    The firm should be taking advantage of the latest technology to share their intellectual property internally in a manner that will allow any of their employees to take advantage of the knowledge available to benefit their customer. You should be getting more than just the experience of the reps on your account — you should be getting the experience of the entire firm.
  • Depth of Experience
    Harvard MBAs look good on paper, but you want a significant amount of deep operational work conducted at real customers in industry, not theoretical research projects conducted in the safe confines of the ivory tower. In addition, make sure at least one of the reps on your project has deep experience in the categories you will be sourcing.
  • Mix of Experience
    A breadth of experience is important, especially when market conditions change and new sourcing strategies need to be derived. In addition, make sure the firm has employees who have crossed the breadth of operational roles, including sales and customer service.
  • Ability to ‘Advise’
    The ability to ‘consult’ is good, but you need specific advice that is going to allow you to succeed beyond what you could do in-house or with the lowest-bid consulting firm.
  • True Independence Where YOUR Outcome is Concerned
    They must be focused on YOUR best interests, and not theirs’. Make sure their interests don’t lie in relationships that force them to use, or compensate them to use, particular tools, processes, or staffing agencies. Just because something works for the majority of their current clients, it does not mean it will work for you. It might, and if it does, that’s great, but if it doesn’t, they should have the freedom to put together the best solution for YOU.
  • A deep focus on IP, Benchmarking, and Research
    No one knows everything … and, more importantly, if they don’t benchmark, they won’t know how good they should be able to do.
  • Operational Business Focus and Advisory Experience Beyond Simple Negotiation
    The best advisor can offer services that guide you through the sourcing lifecycle and beyond. In addition, sometimes just having an independent party available can help you build consensus and support in complex and sensitive situations.
  • A Sensible, Proven, and Flexible Methodology
    If their method of negotiation methodology selection starts with “eenie, meeniee, minie, moe … “, simply put, you’ve chosen the wrong advisor.
  • Respected in the Market
    You want an advisor that oursourcers and suppliers respect … because if they don’t bid, you don’t save.
  • Multiple Customer References You Can Talk Too Directly
    The ultimate proof of their capability will be in their success with their other clients.

Cross-Blog Challenge: The “Seven Grand Challenges” for Supply Management

Back in the spring, ComputerWeekly.com, ran an article on the “Seven Grand Challenges for IT over the next 25 years”, as reported by Gartner. They were:

  • Elimination of the Manual Recharge
    With the increasing ubiquity of portable battery-powered devices, the development of batteries that can be charged remotely or devices powered by a remote source
  • Parallel Programming
    Allow multiple, slower speed processors to perform tasks in parallel
  • Non-tactile, Natural Computing Interface
    Remove the need for the mouse, keyboard, etc. and give us the Star Trek computer, or at least the virtual 3-d display being proposed in movies like Paycheck
  • Automated Speech Translation
    To allow communication with computers in any language, as well as communication between any two people speaking any two languages with the aid of the machine
  • Persistent and Reliable Long Term Storage
    Given a recent estimate (by Dr. Francine Berman) of 161 exabytes (1018) of digital data generated in 2006, the need for storage is increasing exponentially.
  • Increase Programmer Productivity 100-fold
    The removal of uncertainty in meeting future software demands will rest in increasing the productivity of the programmer.
  • Identify the Financial Consequences of IT investing
    Conveying the business value of IT in readily understood terms.

As a technologist by training, I found these very interesting for a number of reasons.

First of all, these challenges are not mutually independent. Increasing programmer productivity will require the creation of better programming environments that will not only allow programmers to code better and faster, but to also take advantage of parallel programming. We already have 8-core machines available for home and small-business use (by way of the Mac Pro, for example), but today’s implementation of today’s parallel programming techniques (achieved primarily through multi-threading) are challenging even for expert programmers. In addition, a natural computing interface will need to involve speech, and we don’t even have speech recognition software that is acceptable out of the box – it still has to be trained for each specific user, who has to actually train herself to talk consistently, to achieve useful accuracy – and it’s generally incapable of differentiating between when speech is part of a sentence or a verbal command – and the utterance of “Do Not Delete. Document is … “, for example, during transcription could delete the entire document!

Secondly, without the wide-spread introduction of entirely new types of technologies, or the re-introduction of old technologies thought destined for the trash bin, they may not be obtainable. For example, how are you going to eliminate the manual recharge? We can’t send traditional AC or DC current through the air – the best we can generally do is radio waves and light rays. Light rays are blocked by opaque objects, leaving radio waves – the low-energy, long wavelengths of the electromagnetic spectrum. Now, since these waves are a form of energy, it is possible to continuously receive these waves and “harvest” the energy by directing it at a rechargeable power source, like PowerCast is doing, but the vast majority of today’s devices require a lot more power than you’re going to get from conventional radio waves – so we’re going to need to create devices that require significantly less power or that are capable of capturing the energy we generate. This technology has existed for quite some time in the form of balance wheel escapements used in self-winding watches that power themselves from the movement of the wearer. In the near term, the solution will probably come in the form of miniaturization and power-reduction and the combination of multiple power harvesting technologies.

Thirdly, they recognize that the greatest challenge will likely always be conveying the value of new technology, and, more importantly, of funneling dollars into R&D to allow for the development of the new technologies that will be required to allow the value, and role, of IT to continue to increase.

Fourthly, they got me thinking about what the grand challenges are for supply and spend management. I have my ideas, and will share them in a future post, but first I want to propose this as the foundation of the next Sourcing Innovation cross-blog series, that will run September 15 (2008) through September 26 (2008), and challenge every blogger and guest-blogger in the space to come up with his or her own seven grand challenges for Supply & Spend Management.

As with previous cross-blog series, I will maintain a complete listing and cross-blog linking of contributions and publish guest posts from those guest-bloggers who wish to post on SI. I’ll also kick-off the series with my own list on September 15. While you’re waiting, you might want to go back and check out some of the previous cross-blog series which included:

Start with Sourcing

Sourcing … lies at the nexus of a number of functions and business units, and is therefore in a position to influence action across an organization; it can be a strong leverage point for starting a green initiative. By working with senior leaders in other functions, sourcing executives enable a successful, holistic, multifunctional strategy for reducing environmental impact while cutting costs and building better relationships with suppliers and communities.
  Martha Turner & Pat Houston, Strategy & Business

This is a great quote … and why this blog is about Sourcing Innovation. Successful sourcing is the only way to simultaneously make a significant impact on the balance sheet and on the environment while improving operations and supplier relationships. As the article points out, green sourcing is not a departure from the way sourcing is currently practiced, it’s an augmentation. The goal of sourcing is to find the best possible deal for the company from a Total Value Management perspective – which takes into account all costs from the initial extraction and acquisition of raw materials and services to the final disposal of the product. And green sourcing, contrary to popular opinion, usually saves money, if not lots of money, from a total life-cycle analysis. (3M has saved over $1 Billion by going green. To date, Kaiser Permanente has achieved a recurring annual savings of 9 Million across 30 initiatives, and not one required a cost increase.)

Consider energy-saving virtualization technology. It might cost a little more up front, but it will save bundles in energy costs. Or consider investing in renewable power plants based on solar, wind, or hydro power. They might cost more to build than another coal furnace – but you don’t have to buy fuel year after year after year. And, most of all, consider using easily reclaimable and recyclable materials in your products. Then you get to reuse the materials again and again and again – and if you set up an end-of-life program where customers can return the products to you free of charge, you could save a bundle down the road. And consider the example of soy-based lubricants given in the article. At first glance, petroleum seems the cheaper choice, at $1,500 for an annual purchase of 300 gallons, compared to $3,195 for soy. But petroleum has costs that are not immediately obvious: $300 per year in waste costs, $2,400 in costs for spill administration, $1,000 in fees to minimize the waste from spills. When these factors are taken into account, the monetary cost of using petroleum-based lubricant for a year is $5,200–and that’s not considering the less-quantifiable environmental cost of using a nonrenewable resource. With no such add-ons, soy is clearly the more cost-effective choice in addition to being more environmentally friendly.

A well thought-out sourcing plan that takes into account the environment and green initiatives does more than just allow a company to reduce and control costs. It allows companies to capitalize on the growing awareness of green issues, helping them attract customers, motivate current employees, and recruit new employees. It enables companies to respond more effectively to regulation, or even to anticipate it. Finally, green sourcing allows companies to deliver on the promises made in corporate social responsibility (CSR) reports.

In addition, green sourcing encourages the same kind of in-depth, widespread awareness of practices and processes that companies have gained from adopting Lean Six Sigma, process optimization, collaborative decision-making, and other quality-oriented methods. If you think back twenty-five years to when these initiatives were just starting out, you might recall that the common “wisdom” was that better products cost more, when, in fact, we later found out that they didn’t — they costed less as they lasted longer, had lower defect rates, reduced warranty and return costs, and made for a better brand image, which allowed a company to attract and retain more customers.

Innovate – It’s Death or Glory

A few months ago, Industry Week ran a great article by Blake Glenn of ?What If! that noted that US manufacturers must make a fundamental shift in the way that innovation is perceived and delivered if they are to regain the competitive edge that they need to keep from falling behind. Furthermore, it also noted that while innovation is seen as important in most organizations, the components to drive innovation are often lacking, in need of refinement, or misunderstood altogether. I’d have to agree. There’s not enough innovation out there today. We need more!

The article also listed some of the fundamental and damaging misconceptions that are all too common, and that need to be corrected. Beliefs that “innovation is about process”, “innovation requires significant investments of time and money”, and “innovation lies solely in the hands of R&D” are incorrect and will halt innovation before it has a chance to begin. The fact of the matter is that “innovation is about inspiration and perspiration”, “innovation requires significant investment in the willingness to innovate”, and “innovation lies in everyone’s hands” and that if you don’t accept this, you don’t have much of a chance of becoming an innovative leader. (And considering we’re in a recession, you definitely don’t want to make any innovation mistakes.)

And, most of all, as the article points out, it’s a deeply complex multivariate phenomenon and at its heart lies a single subject: people. People who must think differently, who must be encouraged, who must be empowered, and who must be rewarded for their ideas. They must be encouraged to change and take risks. And to constantly look for better ways to do business as a whole – be it accounting procedure improvement, logistics streamlining, or new product introduction.

Furthermore, new product innovation does not stop with the product – it goes beyond to include everything that has to do with the product and includes packaging, production processes, and distribution. It also covers the entire product life-cycle. It involves designing for efficient manufacturing, designing for minimal packaging requirements, and designing for disassembly and recycling.

It’s a behavioral shift … and possibly the only one that could save your company if times get tough. Winners persevere and evolve. Losers … well … when was the last time you saw a dodo?