Category Archives: Sourcing Innovation

Sourcing 2007: Part IV

In What’s Ahead for 2007? Wharton predicted the following:

  • In U.S., Housing Slump Tempers Upbeat View
  • India Is Rocking
  • Spain and Europe: Banking on Continued Growth
  • Challenges Ahead for Latin America
  • The Outlook from Inside China

Furthermore, be it directly or indirectly, all of these will impact your supply chain. After all, falling housing costs are dragging down the GDP and weakening your strength in the global market. Moreover, if housing costs stop falling and start rising again, an employee’s cost of living will rise, and as cost of living rises, so does wage pressure – after all, if you do not, or your supplier does not, keep up with inflation, given the current talent crunch, your best employees will likely go elsewhere. Thus, your costs are going up, and not just because of raw materials.

The rocking stock market is driving investment in India, which means that if you’re looking to enter the country, you will have a rapidly diminishing available talent pool to pick from. But if you’re already doing business in India, you could be leading the pack in the year ahead.

With significant price gains in European stock markets and a strong euro, investment is going to continue to flow into the region. Expect stronger competition from your European counterparts in the year ahead.

Despite a strengthening economy, Wharton has it right when they note that some governmental reforms are necessary in order to achieve more stable, and less corrupt, political systems and that growth in many Latin American countries will continue to be limited by the weaknesses of the state and that the consequences of this weakness include deficient public services, a fragile judicial system, high rates of crime and corruption, tax evasion and a sizable informal economy. Of course, the same can be said about parts of Africa, but they don’t seem to be under the microscope this year.

China is going to effect you no matter where you are or what market you’re in, even if no one can tell you how. That’s all I have to say for now.

The IACCM noted that even though China and India are the emerging markets of the early 21st century, tomorrow’s hot spot could be a different market altogether. The country they highlight is Russia, the world’s eighth most populous nation that is rich in natural resources, including timber and farmland. Russia has problems similar to those Wharton pointed out for Latin America, including weak intellectual-property rights, pervasive corruption, and a shaky government commitment to private enterprise, but as progress is made in these areas, those countries that are able to establish a solid base early could be poised for explosive future growth.

CNN Money (January 4, 2007) reminded us that right now the biggest problem with job growth isn’t too few new jobs, it’s too few skilled workers. The talent war is in full swing and this year it will be taking no prisoners.

Back in October The Economist warned us of the Slow Road Ahead and that America’s long-term potential rate of growth is falling, perhaps to its lowest pace in over a century. Canadian Business echoed the sentiment in its Outlook 2007 edition that started the year off. It pointed out that on a year-over-year basis, real economic growth slowed to 3% in the third quarter of 2006–the lowest since early 2003. And it’s likely to get worse. At this point, the primary drag is coming from the direct effects of the burst housing bubble. A year ago, resale home prices were rising at a 17% annual rate; they’re now falling at a 3% rate, the worst result in at least 38 years. Pulling this all together, we expect global growth, excluding the United States, to come in at 5.3% in 2007, not far off 2006’s generational best of 5.8%. Including the U.S. drags the global forecast down to 4.5%, the lowest in four years. Thus, things will still be tough in North America, but that’s a good thing – it will force us to become better at spend and supplier management, which will allow those companies that do to take off like a rocket in the next upswing.

Wharton, The Economist, Canadian Business, CNN Money, and the IACCM are not the only media outlets making predictions – Aberdeen and AMR jumped into the game with the new year, but they always have a lot to say, and I’ll be tackling their viewpoints throughout the year.

Sourcing 2007: Part III

David Bush of e-Sourcing Forum [WayBackMachine] started off by predicting that optimization will gain more mainstream traction (and considering companies employing optimization with advanced sourcing techniques are still saving almost 12% per event, now more than ever you have every reason to adopt optimization), M&A activity will spike, and supply management technologies will continue to align, particularly in what David calls the triple crown: spend analysis, strategic sourcing, and contract management. I’ll go one further. I think this year you’ll start to see integration with e-Procurement systems that help buyers manage their individual buys.

Tim Minahan predicted that all of those crazy sustainable supply strategies that he’s been touting over on Supply Excellence [WayBackMachine] are going to hit the mainstream. Well, I think they will at least hit best-in-class – after all, despite a few fiascos, Walmart is pushing for it – and with that clout, it’s going to happen, even if a few stumbles are made. Furthermore, Tim Minahan, in “Kicking and Screaming”, also predicted that you will pay higher prices, you will experience a supply chain shock, you will rethink your low-cost country sourcing strategy, and you will lose your top talent.

Charles Dominick of the “Purchasing Certification Blog” [WayBackMachine] predicted that a new wave of low-cost country sourcing is about to hit us, major supply disruptions caused by significant Force Majeure (don’t know what this means, take his “Supply Management Contract Writing” course from Next Level Purchasing, now the Certitrek NLPA) event will occur, and that a few big name executives, unprepared for either the impending raw material cost escalations (thank China) or Force Majeure supply disruptions, are going to be publicly fired in a big way. I’ll go one further – at least one really big company is going to be the subject of a major lawsuit as a result of their failure to deliver (a) necessary components that cause a major electronics or high-tech vendor to lose considerable market share or (b) promised relief supplies in a timely manner.

Jason Busch, who filed some of his predictions on his joint Supply Now podcasts with Tim Minahan on Supply Excellence [WayBackMachine], decided to focus instead on “sourcing tactics” that innovative procurement organizations will be employing in the year ahead. From strategies that dive into currency, logistics, freight, and import costs, to objective alignment, to strategic supplier rationalization, the top organizations will be extending their innovative mark on their supply chain.

Dave M of Buyer Analytics [WayBackMachine] predicted that technology will transform the way your company interacts with suppliers (a statement Apexon [acquired and merged with Infostretch], Connect4Growth, and Servigistics [acquired by PTC] could wholeheartedly support), global procurement will finally mean global talent, spend and supplier management will start its progression from art to science, green procurement will be mandated by forward thinking managers and consumers, and public procurement will be forced to accept modern and lean procurement principles. With the exception of that last point, I think we can all agree – after all, I can think of a few countries that will be as wasteful with public tax dollars as ever this year.

Jean-Phillippe Massin of Strategic Sourcing Europe [WayBackMachine] decided to forego predictions and just give you “27 Purchasing Leading Practices” that you can employ to take your procurement organization to the next rung on the devil’s staircase.

David Rotor of Procurement Investor [WayBackMachine] decided to be coy and avoid the issue entirely, but did point out that we are “Still Fighting the Talent War” and provided you with a nice set of links to posts that complement my own ongoing Talent series very nicely. So I’ll join Tim and David in the chorus: You Will Lose Your Top Talent!

However, predictions have not just been limited to us bloggers. In Sourcing 2007 Part IV, I’ll summarize some of the more salient points from the more traditional media.

Advanced Sourcing is Where It’s At

“Two Turntables and a Microphone”Forget (e-Sourcing Forum, [WayBackMachine]). Advanced Sourcing is where it’s at, and Aberdeen just proved it again.

Regular readers, especially those who followed my summer series over on eSourcing Forum, will know that my favorite statistic to quote is Aberdeen’s finding (from their “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” in June of 2005) that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify an average incremental savings of 12% above those that basic, price-focused auctions alone have generated “The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal”. This month, Aberdeen released the follow up on this study with which found that enterprises that are employing advanced sourcing techniques are still identifying an average savings of 11.9% per sourcing event. Furthermore, best-in-class enterprises are identifying an average savings of 13.7% per event. Considering that savings from basic sourcing techniques tend to reach saturation after a handful of events, the fact that these companies are not only fighting off stagnation but still thriving is exemplary of the power of advanced sourcing and negotiation, which includes bid optimization, cost modeling, flexible bidding, life-cycle sourcing, and Total Cost of Ownership / Total Value Management scoring techniques.

That’s why I spend so much time on true decision optimization for strategic sourcing – which, as I’ve pointed out before, must include the capability to capture all fixed and variable real-world costs accurately (including flexible bidding, tiered bidding, and life-cycle cost support), to accurately model real world constraints (which impacts cost modeling and TCO/ TVM), and to accurately solve the model (using an optimization algorithm that is sound and complete). True decision optimization for strategic sourcing supports and complements all aspects of advanced sourcing and negotiations, and I’m sure Paul Martyn will have more to say on the topic over on CombineNotes [WayBackMachine] as CombineNet was a report sponsor. (I also expect David Bush will analyze some of the key findings over on e-Sourcing Forum as Iasta was also a report sponsor – so be sure to keep your eyes on that blog as well.)

In the meantime, if you haven’t yet started to use decision optimization in your high-value or strategic events – and statistics are telling me that the vast majority of you are not, start evaluating and test-driving the solutions the market has to offer. After all, It Pays to be World Class.

Show You The Money, Part II (Supply Chain Cost Avoidance Basics)

Yesterday we talked about the fact that the best way to save money is to avoid spending it in the first place and introduced you to the 4 F’s of Cost Reduction: Failure, Facility, Focus, and Finance. Today we are going to discuss focus and finance and point out the specific solutions and methodologies you can use to meet your goals of increased cost avoidance.

Focus
This refers to your market focus and how you address the market. More specifically, it refers to your marketing and sales costs. Don’t just let marketing outsource a campaign – there’s no guarantee the agency they select are going to get anywhere near the best prices for print and media production. If you need to bring an agency to help with your message – do so – it’s often a great idea, especially if they understand your target audience. But make sure they’re service costs are decoupled from the print and media production costs you can control and often save big on. Also, if your sales people don’t have the right message, or don’t attack the right audience, they will be wasting a lot of the companies money. It may sound like it’s their problem, and not yours, but the reality is that if they do not make their sales numbers, then your company’s demand will not hit its forecasts. This means that you will not be ordering as much as you thought, and if you cut a great deal that came with a big rebate once you ordered one million units, and you only order 900,000, you don’t get your rebate, you don’t hit your savings number, and all of a sudden it looks like its your fault. So make sure you have systems in place that allow sales to collaborate with engineering, marketing, and procurement and truly understand what they have to sell, what it can do for the customer, and who they should be targeting in their efforts. Also, if they sell more than they expected, they need to be able to inform you quickly so you can adjust your orders to meet a demand surge.

Finance
They say money talks and money walks. But they often fail to tell you that it’s easily the most expensive asset you have. You have to collect it, disburse it, protected it, pay taxes on it, and, more often than not, finance it. And that last one can really cost you a lot of money – even when you are not actually financing it yourself. The fact of the matter is this: if anyone, anywhere in your supply chain has to borrow a lot of money to meet the demands placed on them, they are probably paying a large financing charge, which is being rolled up into their price, which is inflating your price. Therefore, it is vitally important that you understand your supply chain, especially your tier one suppliers, and do what you can to mitigate financing whenever you can. If paying up front will mitigate the need for your selected supplier to take out a loan that costs them 5%, then they will be able to reduce your price by 5%. Unless you have an investment that will absolutely guarantee over 5% return, and that’s unlikely given the unstable nature of investments, then simply paying early can avoid 5% of otherwise non-avoidable costs.

Disbursing your money can also cost you a lot of money, especially if you have people who aren’t buying on contract and using the absolute best price that you spent a lot of time and effort negotiating and securing. Make sure you have a good contract and compliance management system in place to allow you to track your contracted costs, track purchases against those contracts, prevent, or at least alert you to maverick spend (sometimes it might be necessary, in order to prevent a disruption), and insure that suppliers are billing you what they agreed to.

To summarize, you can also save money by avoiding spend in the first place, and you do that with the right strategies supported by the right technologies and methodologies. Therefore, in addition to the nine technologies and methodologies I outlined in Show Me the Money!, make sure you also have the following technologies and methodologies in place to help you avoid spending that cash in the first place!

And now you also understand why I (will) also (keep) talk(ing) about companies like:

  • Austin Tetra (acquired by Equifax),
    Aravo,
    Connect4Growth,
    Open Ratings (acquired by Dun & Bradstreet),
    VendorMate (acquired by GHX, acquired by Thoma Bravo)
    Vinimaya (rebranded Aquiire, acquired by Coupa),
    etc.
  • Browz (merged with Avetta),
    CT Space (acquired by idox),
    Logility,
    New Momentum (acquired by Market Track, acquired by Vista Equity Partners),
    Quadrem (acquied by Ariba),
    Sockeye Solutions (rebranded Vecco International),
    etc.
  • Salesboom.com,
    SalesForce.com,
    etc.
  • Fogbreak Software (defunct),
    i-Many (acquired by LLR Partners),
    International Trade Bureau,
    Nextance (acquired by Versata Enterprises),
    Upside Software (acquired by SciQuest, rebranded Jaggaer),
    etc.

Show You The Money, Part I (Supply Chain Cost Avoidance Basics)

Last week, in Show Me The Money! I asked you to apply various technologies, methodologies, and strategies to stop your supply chain from hemorrhaging cash and Show Me The Money! And if you did everything I asked you to do, it would be a great start, as it would provide you a big, fat, increase on your balance sheet, but it’s not the whole solution. Even though I only addressed every aspect of your physical supply chain from raw material mining through final delivery to the end customer, I only addressed the physical supply chain. Furthermore, I only talked about cost reduction technologies, strategies, and methodologies – and the fact of the matter is the best way to save money is to avoid spending it in the first place!

So today, we’re going to talk about the other half of the supply chain, and for those of you who want a very simple classification, the cost avoidance half of the supply chain. Just like there are four areas where the right technologies, methodologies, and strategies will save you a lot of money, there are four areas where the right technologies, methodologies, and strategies will help you avoid spending money in the first place. They are the 4 Business F’s of Cost Avoidance (as opposed to the 4 F’s of Product Design, as brilliantly laid out by Eric Hiller in his “The Fourth F”* post on Spend Matters).

The Four F’s

  • Failure
  • Facility
  • Focus
  • Finance

Failure
According to Aberdeen’s “Global Supply, Visibility, and Performance Benchmark Report”, the average company has had an average of two major supply chain disruptions per year and industry average and laggard companies are only able to meet customer-requested ship dates 40% of the time. Every time something goes wrong, it not only costs you revenue (lost sales, etc.), but it costs you had cash as you usually have to take expensive action to fix it. Thus, if you could prevent failure, you could prevent costly expenditures and revenue loss that, when combined, can easily break six, seven, and even eight digits.

So how do you prevent failure? You manage your suppliers and you manage your risk. How do you do this? Through visibility, enablement, and risk-mitigation strategies. Invest in a supply chain visibility system to always know where your parts are, where your parts’ components are, and where the raw material is coming from. If your supplier has a temporary shutdown, you need to know. If their supplier runs into a problem, you need to know. And if the mining company had a shortfall, you need to know. With enough lead time, you can relay an order to another preferred supplier, inform your supplier that they may need to follow up with their supplier to make sure they have the components when they need it, or lock up additional raw materials in a different part of the world – preventing a supply chain disruption long before it happens. With a supplier enablement system, you can not only help them inform you of potential problems before they happen, making sure that such problems are resolved before they occur, but you can help them improve their efficiency, which will ultimately lower your costs even more. Risk mitigation doesn’t require a system, just good planning. Make sure you have at least two suppliers for key purchases – or if they are custom made, and dual-sourcing is difficult, make sure your chosen sole-source supplier has multiple plants where the components could be produced – preventing against disruption by natural disaster or political unrest in a specific region.

Facility
Facility can be defined as readiness or ease due to skill, aptitude, or practice, in other words, facility relates to your level of productivity. Just because you can’t do much about your labor costs, as wages are more-or-less set by the market, that doesn’t mean that you can’t maximize your return. Maximizing your productivity will allow each of your resources to do more, effectively lowering your overall cost for each unit or service you offer. In addition to the strategic sourcing, spend analysis, and award optimization systems I highly recommended you provide to each of your buyers (as such systems have been proven to reduce cycle times by an average of 66% or more), I also recommend providing them with good collaboration, e-Procurement, and Procure-To-Pay systems. Collaboration systems allow remote groups to work together more effectively and e-Procurement and PtP systems greatly simplify the actual ordering and payment processes, allowing your users to spend less time on tactics and execution and more time on strategies to reduce and avoid costs.

Come back tomorrow for a discussion of focus, finance, what-to-do, and where-to-go!

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