Happy New Year from SS

on Tuesday, December 30, 2008

Every year at this time, my late father used to sing:

Should auld acquaintance be forgot . . . .that might not be so bad. But seriously, folks . . .
2008 is at its end, and we’re in the home stretch of a decade. It seems like just yesterday we were wondering what would happen at 12:01 AM, Jan 1, 2000. Now we’re wondering what will happen with Citibank, GM and AIG.

My how the landscape changes; but as Heraclitus was known to say, “the only constant is change”.

An interesting fact though, is that one important tool in managing change is the adherence to time tested practices. No, I’m not going to say that New Year’s resolutions are a time tested practice, but the adherence to them would be, if we adhere, that is.

That said, here are a few New Year’s resolutions that just make sense in everyday business.
  • Remove silly clichés like “you get what you pay for”, “good service costs a little more”
  • Give that sales rep who’s been begging for a meeting/order/test a genuine shot
  • Invite a supplier in for a day to learn how to better serve your company
  • Don’t fall budget/project costs tied to artificially low petroleum prices
  • Tie commodity based buys/contracts to market indices
  • Qualify more suppliers and consolidate to fewer suppliers. Remember that one is not necessary and sufficient of the other
  • Employ the technology necessary to spend your time sourcing instead of buying
  • Undertake projects with long term benefit and short term benefit. Then balance your work investment accordingly
  • Learn the difference between teams and workgroups, and manage your efforts accordingly
  • Remember that projects are terminal but that vision is without end
  • Eliminate “excuse openers” like; I’ve been meaning to call/write/get back to you, you were next on my list of people to . . . , I’ve been meaning to . . ., What a coincidence, etc.
  • Eliminate euphemisms, where none are needed (and many are inaccurate). No more “reaching out instead of “calling”, no more “face time” instead of “meeting” and no more “one off” instead of “privately”
  • Do the right thing, instead of the easy thing
  • Undertake every task as though it was in your job description
  • Never ask for what you wouldn’t give, but strive to give that for which you wouldn’t ask
  • Champion a good cause
  • Work as though your life depends on it, even if you have to remind yourself that it does

If we could all keep to just a few of these, I think it might get a little easier for us in the long run.

Happy New Year; peace and prosperity to all.

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Can you hear me now???

on Monday, December 29, 2008

Caveman technology (Plain Old Telephone Service) is fading out but should you turn your back on it?

An Information Week article by Marin Perez discusses the weather-related power failure of AT&T’s 3G wireless network; “A storm caused AT&T (NYSE: T) to have massive voice and data outages across the U.S. Midwest and along the Eastern Seaboard Sunday… The disruptions varied for subscribers, as some experienced dropped calls, while other had no access to voice or data services. Other users experienced slower mobile data service, or no access to AT&T's 3G data network.”(Information Week.com)

More and more people are getting rid of their home telephone lines and using their cell phones as the only source of telecommunications. Although you are removing the small cost of the phone line, are you losing a life line?

Your home phone line is most likely a pair of copper wires that will work even when there is a power failure. If the power is out and a ‘storm’s a comin’, how are you going to make or receive a call?

In some rare cases, like the one in Junction City Oregon; “Hundreds of residents in rural Lane County lost their telephone service after metal thieves stole more than 450 feet of phone line west of Junction City.” (Oregon Live.com) There were over 800 people affected who may or may not have had cell phones.

So what’s the lesson? Do you spend the extra $20 bucks a month to keep your house phone along with the fancy schmancy 3G technology? Keep them both.

Most businesses use redundancy, so use it at home! If there is an emergency, you will be glad you did.
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Happy Procurmiczaa from The Sourcerer

on Tuesday, December 23, 2008

Whether it’s a Christmas Tree or a Chanukah Menorah, ancient rituals marking the Holiday season are upon us. And even those who celebrate their Holidays with a Festivus pole or Kwanzaa (the extra a, is for Apple) device, are making up their wish lists for the many gifts they hope to receive.

So it came to the Sourcerer, upon a midnight clear, that those in procurement should have their own High Holiday. And they shall call it “Procurmicazaa”.

As the Sourcerer sat silently sourcering Sunday, thinking of all things procurement (and the line for the Giants/Panthers game) he thought to himself; what would make Procurmicazaa stand out? What would make Procurmicazaa legitimate; not some copycat holiday generated to mock the ancient and High Holy traditions of holidays such as Chanukah and Kwanzaa?

Procurmicazaa, after all had no consecrating event, such as the birth of Christ, the Maccabean revolt, or the Kwanzanian Kwanzaa thing that happened a while back, upon which to call. It had not the centuries (or in some case, weeks) of tradition those others do to reinforce its place in society. What then, would make Procurmicazaa stand?

And then, like the thunderbolt that announces the first fruits of Kwanzaa (we guess), it hit the Sourcerer. Procurmicazaa would not be like the other Holidays, it would be their antithesis. After all, those Holidays are all about giving. Procurement though, is the act of getting. What better Yang to the end of year Yin, than a Holiday that’s more take than give?

It’s long overdue. Finally, a holiday that stands fast in the face of all that rampant generosity and gives testament (pardon the pun) to the brash consumerism that truly marks the end of the year. I The Sourcering could hear them caroling, “Tis the season to be greedy”, “Oh come all ye shoppers”, “The Little Discount Boy”, “Have yourself a basket full of bargains” and the new classic, “Silent sale”. In that moment Procurmicazaa was born.

So this Procurmicazaa, (yes, as always Dec 23-27, and Dec 31 from 12:30 PM until Jan 2), remember those about whom you care, not by giving to them but for that which you get from them. And isn’t that what Procurmicazaa is really all about anyway?

Procurmicazaa, a brand new Holiday steeped in the rich tradition of Festivus and another holiday with an extra vowel. And it’s all ours, just for the taking.

The best from you and yours!
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Production Efficiencies, JIT, and Supply Chain

on Monday, December 22, 2008

Unstable markets can cause a lot of problems, but they can also help expose the weak points or gaps in your supply chain. When companies map their supply chain, typically step one includes identifying direct raw material suppliers, and then the suppliers to those suppliers. Step two is identifying where each of those suppliers production facilities are located, and examining their capacity, output, ISO status, etc. Step three, which is often overlooked, is understanding how each of those production facilities manages their inventory.

Suppliers, in the face of cash shortages and increased pressure to see quarterly increases in profitability, are making their facilities more and more efficient, and that move includes keeping little or no on hand inventories, normally as part of a JIT manufacturing process. But take a look at where a majority of domestic feed stocks, particularly oil and chemicals, come from – The Gulf Coast. Year after year, the gulf coast has made headlines for the number and severity of natural disasters, yet suppliers continue to manage inventories as if facilities will continue to run 24/7 with no problems, essentially treating plant closures as a non-factor.

A perfect example of the problem with this approach is the current allocation issue happening with Base Oils. As Steve Tatum referenced in his recent blog on lubricant prices, supplies were already tight before storm season this year. To cap it off, most producers make product to order, and hold little or no inventory, in order to keep costs down and margins up. The storms came through, production stopped, and month later many customers are having difficulty getting product. This perfect storm caused prices to sky rocket, and left customers scrambling to find product elsewhere.

Base Oil producers felt the JIT approach was the right one, as they couldn’t justify additional expenses to make lubricants, even though the margins per metric ton are at an all time high. Regard for the customer went out the window.

Suppliers need to recognize if they build plants in unstable areas (war, weather, etc), then their risk of outages becomes greater. If they don’t consider warehousing inventory, then they are putting their customers at risk.

The way to get suppliers to shift the focus is to ask the right questions and show the supplier you are paying attention. When examining your supply chain and choosing suppliers, understand and review these issues. Supply Chain needs to challenge their suppliers on how they manage inventory, and make sure their disaster recovery plans include warehousing inventories to counterbalance the effects of unscheduled plant shutdowns. Without pressure from their customers, suppliers will continue to focus on short term profits rather than long term risk aversion. Ultimately, if a supplier has facilities in high risk areas and is unwilling to make an inventory investment, they shouldn’t be in the business.
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Friday Rant -Bad Procurement Happens to Good People

on Friday, December 19, 2008

It's been seven days without electricity in my neck of the woods. Over 500,000 homes lost power, National Grid bragged that by yesterday only 35,000 remained without service. The media said it was 46,000. But who are you gonna believe? The sensationalist media, always trying to get the news out, or a public utility/state government that is far less concerned with the 8 people who have already died, than the bad PR that could arise from this idiotic mess.

I've been on the phone with Grid at least 4 times a day trying to get an update on when they'll restore power to the 12 homes in my neighborhood still without service. Evidently, though. No one in customer service is able to tell me when someone will be out to fix the downed line(s) that are changing our daily lives. It seems that National Grid is the one public utility that simply puts field service personnel into trucks every day and lets them do their own thing. It's an interesting model.

Grid has gone further to tell me that they're working around the clock with other power companies from across the country to restore service. That's comforting. I know they have people in the field from all around. I see their trucks parked in hotel lots, donut shops, pizza shops, and even alongside streets, doing nothing. I saw two crews with one man working and nine orange cone supervisors alongside a highway a few miles from my home. They've even come to my house; four times. One rep didn't want to survey the damage too closely, she said it "looked slippery back there, and besides, they have to get the tree people in here". Three other reps stood nearby the damage, doing nothing for about three full hours. I asked them what they were there for. They told me they were on "standby"; a ten on the accidental comedy scale. On day 5, actually night 5, I finally kidnapped a Grid rep (inspecting a loose wire for a house a few doors down) to survey the damage. He said it was a simple fix, but that he couldn't do it, because he wasn't allowed to touch work outside of his orders.

Today the tree people came, and started cutting broken limbs a few doors down. I asked if they were going to get to my house, they said no. they were the state tree people, and National Grid has contractors to handle utility work. Those contractors haven't even driven past my house, to my knowledge.

So here we sit, seven days later; me and a bunch of my neighbors waiting helplessly for national Grid to burn a pile of money on overpaid, inefficient, sluggardly, robots to do half-assed job that they'll all beat their chest over in a week or two. Here we sit with a governor's office that has ignored our phone calls and letters, throwing a pile of our money at a line full of contractors fattening their pockets while two out of every three workers stands around drinking the coffee out tax dollars bought them, watching one man do some (and "some: is kind) work maybe some of the time.

7 days late, only 46,000 still without power (sorry Grid, you've lost my trust). So Grid can beat its figurative chest about 94.6% competencies only seven days late.

So how is this related to procurement, you ask?

Well, let the Sourcerer answer that question with this question. If FedEx delivered 94.6% of your freight, would they still be your supplier? If you needed your loading dock cleared for another delivery, and two men stood around drinking coffee while one unloaded freight, would those two guys still be employed at the end of the day? If your MPLS was down and the IP told you how well they had done restoring service to other clients and how they couldn't give you a service appointment date much less a restore time, would you be shopping for a new supplier?

Of course you would. Because business depends on it. You job depends on it. Your livelihood depends on it.

Unfortunately, for National Grid, and State and local government business does not depend on it. So whatever service level you get, that's what you get. No one's going to get fired or even reprimanded for standing around and doing nothing. They've brought in legions of men and trucks to do nothing like no one has ever seen. As a matter of fact we're paying them overtime and double time for business as usual. So why on earth would they want to work faster? There's a clock to milk, and the cows are fat in a state of emergency.

It doesn't end there folks, Massachusetts governor Patrick even rode through a few areas and commented on how bad it was, and that we had to prepare for the worst. Thank goodness for his warning. It was incomplete though. He should have said, prepare for the worst of human nature, and the disgraceful politics of patronage. I voted for Patrick. I didn't think he was an empty suit at that time. But the proof as they say is not in the pudding, it's in the eating of the pudding. Well, pudding is a great metaphor for what National Grid and the Governor are feeding us. If the esteemed Gov. really cared a lick, he'd have been holding a chain saw instead of a microphone.

Somewhere, as much as Grid and the Government try to pretend it isn't happening; folks are in positions of power procuring resources to fix this mess. The resources are functioning at a capacity that no modern day business would consider anything better than incompetent. Why? Because it's not in their interests to serve the public, it is in their interests to reward those who can contribute to campaigns and put pools in their backyards. And their jobs and livelihoods do not depend on public service. They’re tied to fashion shows every four or six years, and filthy back-alley deals that belong in 3rd world countries.

But here's the sickest, ugliest end of procurement we can imagine. While it's true that the lives of the slugs in state and utility management are not tied to mere competence, much less effectiveness, the lives of citizens are tied to that competence. Eight residents of Massachusetts are dead. I would "hazard" a guess that at least a few of them died because of the loss of power, or accidents related to a Department of Public Works that has left forests worth of dead and dying trees uncut and uncleared for years on end. All this while those DPW reps sit for hours on end in their cars and drink the coffee we bought them, while they rush to issue tickets for parking on the wrong side of the street on leaf collection day, or stand for hours, on "standby".

It was the Grid rep's boast about how they only had 35,000 people without power after six days, on top of one reps response of "it's like that everywhere" to a power line laying broken in my neighbor’s back yard, on top of some idiot trying to weight the ontological considerations of being without power for three days respective to other situations, that made me cut her short.

"Wow, only 5.6% of customers in life threatening circumstances after six days!" I responded. "If that was my job performance, I'd have been fired on day two. So you're bragging about one disaster after the first one!" She drew her breath to respond, and I added. "But hey, only 8 people are dead so far." She paused and then told me she'd have supervisor get back to me. That was the third promise that a supervisor would call me by the way, but this time a supervisor did call me. She said they were aware of the problem but that she couldn't tell me when power would be restored, or connect me to someone who could tell me.

Meanwhile, My 80 year old neighbor and her handicapped husband were put out their hotel yesterday after four days in, because the room had been pre-reserved for a convention. Another neighbor has a broken electrical wire sitting uncovered in their backyard, and cable and phone service have long been restored by the cable company, because they placed a tiny generator astride a phone pole and return every 8 hours to fill it with gas so their customers have service.

The moral to the story; keep your sense of humor, but take procurement seriously. One never knows how far a half-assed job will reach. Procuring half-assed help to do a half-assed job can be downright criminal. Here in Massachusetts, we're learning the reach of bad procurement more painfully than we ever imagined. There are eight families who know just how much bad procurement matters.

But there are those of you who show up for work and invest yourselves in doing a good job and striving for excellence. The Sourcerer thanks you. It's you that we look to in times like these. Perhaps someday, we'll find some of you in public service, instead of quietly serving the public good.
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OPEC's Search for Oil’s Floor Could Help America "Kick the Habit"

on Thursday, December 18, 2008

With oil prices reaching lows near $40 a barrel, and financial heavyweights like Merrill Lynch predicting that the per-barrel price could fall as much as another $15, OPEC officials have announced plans to reduce oil production. The proposed 2 million barrel cut in daily production of crude will be the largest one-time reduction in the organization’s history.

OPEC hopes this reduction in supply will help to counteract the downward pressure declining global demand has exerted upon prices. Due to world-wide economic problems, demand for oil is expected to fall by another 700 thousand barrels a day this year, and as much as 1.4 million barrels a day over the course of 2009. OPEC leaders feel that the announcement of a significant supply reduction will “shock the market” into putting a floor under crude prices.

In taking these actions, OPEC has set itself up to perform a delicate balancing act. On one hand, there is the tactical goal of increasing profit margins by decreasing supply, and bolstering the price, of crude. On the other is the strategic incentive to keep the price of oil low enough to stimulate economic recovery for its most valued, and most oil-addicted customers (USA, Europe, and China). John Farrell offers an interesting opinion on the situation in a post to US News & World Report’s website.

He suggests that, in America at least, this proposed price rebound will hurt OPEC in the long-run. Farrell comments on the hampering effects declining oil prices could possibly have had on President-elect Obama’s green technology initiatives and writes, “Think about it. They had us where they wanted us—falling in love again with cheap oil. And now, greedy fools that they are, they re-fuel our resolve.” He feels strongly that a rebound in oil prices could very well be the final dose of encouragement the Untied States needs to kick its oil addiction once and for all. I agree.

Not only do I agree with Mr. Farrell, but I also would love to see the USA lead the collapse of global addiction to Middle Eastern oil. I often feel that the U.S. has lost its competitive advantage in many global (and even domestic) markets. We’ve gotten fat, happy, and lazy in our gas-guzzling years of grandeur and, as a result, haven’t been all that innovative. I believe that these tumultuous times offer the United States an opportunity to blaze a new trail down the vast frontier of sustainable energy. Not only could American innovation and investment in green technology provide economic prosperity to America, but it would also help to ease oil-related tension in the Middle East and aid in the fight against global warming.
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How to Fix Index Based Pricing

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When developing a contract for materials that experience significant price shifts due to market volatility, many buyers will tie the cost per unit to an industry recognized index. The idea behind indexing is to take the volatility factor out of the price, which allows the supplier, now hedging less risk, to provide a lower margin. Tying to an index also makes it easier to compare proposals from competing suppliers by setting the index price for quoting purposes. For example, on an RFQ for steel drums, you might set the steel price at $400/ton. Then all suppliers are quoting the same material cost, and the difference in price will only be due to margin, overhead, and the tare weight of their drum.

Tying to an index takes risk out of a supplier’s quote, and does have a positive impact on bottom line cost. However, many companies find that having a fixed, predictable price is just as important, or even more important, than having the lowest possible price. A fixed price allows companies to easily cost out end product, and gives sales people greater flexibility when quoting business. In addition, in many cases, companies will hold off raising their price in spite of increasing raw material prices, so fluctuations in the index end up eating into your company’s margin.

So how can a buyer optimize the two seemingly competing concerns of getting the lowest possible price and a price that is fixed?

The focus should be on getting the best price possible up front, then ensuring that market swings have a marginal effect on the final price. Below I examine three factors that should be considered when developing an index based price structure. Considering these factors will help offset dramatic index shifts and at the same time maintain the basic principles behind indexing raw material costs.

Choose the Right Index
In many markets, there is more than one industry recognized index that prices can be tied to. Examine several indices, and determine which has been the least volatile over the last 5 to 10 years, depending on the commodity, then tie pricing that that index. In markets where different indices vary dramatically, I recommend index averaging, which will offset major swings in either index. This works especially well when a standard index is averaged together with a scrap index. A note of warning though – if your end product doesn’t use scrap, your index shouldn’t either!

Add a Cap
Though they hate to admit it, most suppliers are sitting on significant raw material inventories. Tying to an index typically throws the notion of sitting inventory out the door, as the price will move with the market regardless of how much inventory the supplier has at the old price. One way to include these inventory advantages into your contract is by adding a cap on the upward shift in price.

For example, let’s say we set a starting price at $10, with a 30% cap. If markets go up, the price will go with it, but it should never exceed $13. The idea is that once the price hits $13, the supplier will be required to buy enough inventory to last until the market calms down. Typically, the supplier already has this much inventory, and it isn’t a problem. .

Many times, suppliers will ask for the same consideration for decreases in the market price, but the logic does not hold true. When prices take a downward turn, suppliers have the flexibility to buy raw materials at the lower cost, and they will take full advantage of it. There is no reason why they shouldn’t extend that opportunity to you, the end customer.

If a supplier gives significant pushback on upward caps, a buyer can always provide assurances that any inventory held on their behalf will be used up, even if the contract expires. This allows the supplier to justify the buy and calms an fears that the supplier will be left “holding the bag”.

Timing is Everything
Pick the right timing for adjustments in price, the longer the better. Remember, you negotiated the best possible price at the beginning of the agreement, the goal now should be to keep the price as stable as possible. Many suppliers look for quarterly adjustments, which are reasonable. If the material being purchased is critical in your supply chain and a major factor of the finished price, then semi-annual adjustments should be considered. When negotiating a six month price change, keep in mind that you are essentially asking suppliers to sit on six months of inventory at a time. Providing shorter payment terms as a bargaining chip could go a long way.

Index based pricing helps both buyers and suppliers, but keep in mind setting the starting price is not the end of negotiations. Once you pick your supplier, you should partner with them closely to develop a price change mechanism that keeps as much volatility out of the price as possible.
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Unstable Economy Yields Shift to Technology

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You can hardly turn around without news of economic woe slapping you in the face and with little relief in sight, many companies are scrambling to identify ways to better manage spend and reduce cost. Some spending is being eliminated, but where this isn’t a possibility, less expensive alternatives are often available. While reducing travel is almost always a possibility, it is not always the best option, especially for those businesses relying on travel for sales, client presence, and project staffing. A technology many organizations are taking advantage of to relieve budgets while leaving day-to-day business unscathed (or even improved) is Video Conferencing.

Using video or web conferencing as an alternative way to reach out to any and all business constituencies will certainly save dollars on travel but will also afford other benefits that would not be possible without the utilization of technology. A closer relationship can be established between the users. While we all wish we could fly in for every project status meeting with our clients or sit down face to face for every step of the interview process, it just isn’t realistic for many companies. With web conferencing, face to face discussions can be arranged ad hoc with far greater frequency than physically visiting a remote location and with little or no additional strain on schedules or budgets.

Some additional benefits include integrating regional teams and expertise in geographically segmented businesses. On the same order, web conferencing could easily enable a business to expand into a region that would have previously been a financial impossibility depending on the nature of the business and the cost of travel involved.

While taking advantage of some of the dollar saving benefits of video conferencing, organizations also reap the benefits of going green by spending more time in the office and less time on planes, trains, and automobiles. Less time travelling and more time in front of the camera also equates to relief of the travel time and burden of in-person meetings for all involved; less stress for the would be traveler and less preparation and more flexibility for the host location.

Many organizations are realizing through budgeting necessity that they have already been ignoring the power of a very important tool. They are finding that, in addition to cutting costs, there are many added benefits that can really help sharpen their competitive edge. For companies with adequate networks and a little room in the technology budget, this shift makes perfect sense. We can only hope the economy settles down enough to nurture this shift as well as the technology it will inevitably bring with it.

Source One can assist your organization in identifying the correct telecommunications and technology solutions for your business and ensure the best value for your purchase....Telecommunications Strategic Sourcing.
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Investment 101

on Wednesday, December 17, 2008

So unless you have been under a rock or in a dark cave, hiding from the recession of course, you have heard about the Madoff scandal. Bernie Madoff has been orchestrating a “Ponzi Scheme” in which he was able to pay early investors non-existent “returns” with the funds brought in by new investors. He has told authorities that with this scheme he has lost about $50 billion in investor’s money.
Wait, what was that? Was that a B in front of that illion?

The first thing many people ask is “Who is this guy and how did he do it?” I’m sure most of us wish we had the skills to convince people to invest billions of dollars with us. I recently listened to a discussion on NPR trying to understand this. They discussed how he was able to generate an environment of exclusivity around him in which it became a status symbol for Madoff to handle your funds. He was able to get investors so worked up over abnormally consistent returns that they were quite literally begging to give him their money. People were joining one of the half-dozen country clubs he belonged to just for the opportunity to discuss finances with him. Didn’t anyone notice this guy was somehow making money when every else was losing it? Of course someone did – even though most just wanted to see him as a magical wizard from a far away land that was able to make money appear from thin air. As discussed in an article from CNN, it was brought to light that 8 years ago a rival financier wrote a letter to the SEC calling Madoff’s operation “the world’s largest Ponzi Scheme.”
So you’re telling me the government didn’t respond appropriately and an exorbitant amount of money was lost? Call 911, I think I just had a heart attack.

The second question someone may ask; and I think a little more importantly, is exactly how does “supposedly” one guy accumulate that much money from investors? How is one man able to “lose” about $50 Billion? As this story develops they are looking at who this scheme has affected and where all that money came from. More and more stories are popping up about couples losing all of their life savings, hedge funds crumbling, and non-profit organizations closing their doors. So that means that person/organization/company invested so much of their money with one source that they are now bankrupt. This is investment 101 people. A range of old adages comes to mind, “If it’s too good to be true…”, “Don’t put all of your eggs in one basket.” Even the most naïve 17 year old freshman understands the importance of diversifying your portfolio. These were knowledgeable, many professional, investors that placed 70-80-90% of their portfolio in his hands. They were so excited about the consistent 12-13% return he was able to provide that they ignored all the warning signs. He was able to generate so much money because people have become absolutely blind in the panic of the looming apocalyptic recession. People are doing anything and everything they can, including throwing their common sense out the window, in order to try to be as recession-proof as possible.

With no signs of the economy improving, companies and organizations need to be smarter about their financial decisions. People still believe in (another old adage if I may) “you need to have money to make money.” Well what about simply reducing your spending and saving money? Source One’s Strategic Sourcing Services help reduce your spend and the overall cost of acquisition through the application of proven sourcing and purchasing strategies. With their contingency based sourcing services, clients are able to realize true savings without the risks of upfront costs, consulting expenses, and resource time consumption. Wow, so you are able to save a lot of money without spending a lot.

So reduce your spending and save money as opposed to jamming as much of it as you can into investments that are too good to be true or simply won’t be around next week.

It’s said “You need to have money to make money,” well don’t forget you also need to have money to LOSE money! So I guess it works out for some of us who can’t lose the money we don’t have in the first place!
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Sex: Victim of Limp Economy?

on Tuesday, December 16, 2008

I figured I’d take a brake from blogging about the otherwise enthralling world of procurement to delve into some social science. This blog, and many others like it, are all wrapped up in the economy and commodities and such, but what about the ancillary casualties of the tanking economy?

I was reading through the New York Times online the other day, as I typically do on my lunch, and I came across an article about how sex tourism in Prague is down markedly. This industry isn’t just coming up short abroad, either. The Mustang Ranch in Reno, NV recently laid off 30% of its workforce. Not even the oldest profession in the world is recession-proof. This got me thinking; can sex become a victim of a lousy economy?

The example of sex tourism is fairly easily explained; people have less disposable income than in the past and therefore can’t spend it on vices such as legal (or illegal) prostitution. Hey, I don’t judge. But let’s dig a little deeper than that. I feel a bit more confident there won’t be any complaints leveled here as a result of this blog as I’m sure 99.9% of procurement blog readers possess some Y chromosomes.

One of the biggest contributors to marital stress is money related. Show me a couple who hasn’t fought over money and I’ll show you two corpses. In a down economy, maybe one or both individuals lost their job or had to take a pay cut and some quick decisions need to be made about how to survive the downturn. Does the mental picture of two rams on a mountaintop butting heads come to mind? When a couple is fighting over money, as might happen in a recession, they’re probably not “in the mood”. It’s fairly anatomically difficult to have sex when you’re sleeping with your backs to each other. Even more difficult if one is on the couch and the other is in the bedroom. Sex becomes a victim of the bad economy.

How about depression? It is no secret when people lose their jobs - take a pay cut, have to cut back on luxuries they typically enjoy - depression can follow, especially with loss of job. Many career-oriented people identify themselves with their profession; take that profession away and those people are as adrift as Rod Blagojevich on an ethics panel. One symptom of depression is reduced libido. Sex becomes a victim of the bad economy.

What about chances to get away from the kids to have some, ahem, mommy and daddy time? This summer, when gas was over $4 a gallon, we heard for the first time the term “stay-cation”. Families vacationed in their back yards rather than the beach. No time for mommy and daddy to run back to the hotel while the kiddies walk the boardwalk. Also, many parents opted not to send their children to day camps and various other camps this summer due to budget constraints, so even less time alone. Again, sex becomes a victim of the bad economy.

This is all theorizing, mind you, but these assumptions make sense. I’m not sure if there’s any sociological research out there covering this topic, but it makes for interesting discussion. Now get your mind out of the gutter and start thinking procurement.
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Learning from Squirrels

on Friday, December 12, 2008

According to a recent article on CNN’s website, many regions on the East Coast are experiencing an absence of acorns this year. I promise this relates to procurement-I’ll get to it. Many residents of normally acorn-rich areas are baffled by the phenomenon. They worry that this, along with the disappearance of honey bees, could be signs of underlying problems in the ecosystem. Some scientists argue that the production of acorns is cyclical, and last year’s “bumper” crop, combined with this year’s abnormally wet spring are to blame for the lean season. Either way, one fact remains certain. Squirrels will have to find something else to eat.

While Alonso Abugattas of the Long Branch Nature Center in Virginia expects the number of deer and squirrel will “certainly go down”, other scientists like the National Wildlife Federation’s Doug Inkely argue that animals can be resilient when their usual food sources go away. He cited the adaptations squirrels, deer, and turkeys made during a 40 year blight that wiped out 3.5 billion chestnuts. Are you seeing the connection yet?

Whether it’s from cyclical aberrations or fundamental market changes, companies, and sometimes industries, occasionally have to change the materials they use in order to remain viable. Take the Portland based company Myhre Group Architects for example. In response to rising costs of steel last year, the Myhre Group began taking advantage of a two-year-old code amendment that allowed them to substitute steel with untreated wood for certain types of buildings. Allen Tsai, a project manager for Myhre said, “I’d like to go with steel…but because wood is less expensive to build with, that’s a developer’s choice for a five-to-six story apartment.” This substitution was made in response to a temporary trend in pricing.

The introduction of plastic was more of a fundamental shift that caused myriad companies to substitute plastic for a variety of materials to improve profitability. On an industry level, consider how a great deal of automobile manufacturers are responding to customers’ environmental and fuel economy concerns by producing vehicles that use less gas or substitute gas completely.

When steel became too expensive, the architects switched to wood. When plastics were more profitable, companies shifted to them. Now that gas-guzzling cars are no longer marketable, the smart auto-makers are looking for alternatives. It sounds silly, but we can learn from the resilience of squirrels. Your go-to materials (acorns) may not always be around. If they are around, they may become too hard to gather. Or, in the positive case, another nut that is easier to gather may come into existence. While you should stock up on acorns for a rainy day, you should always keep an eye on the other nuts in your environment. You never know when you may need them to survive.
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For every turn . . . .

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How many firms have gone from huffing and puffing about the competitive rates at which they secured lines of credit, to quietly admitting that they no long have lines of credit. As the old saying goes “bad loans are approved in good times”. The abrupt end to the good times means that, along with standard lending covenant enforcement, banks have taken every measure to securitize debt.

The short verse; many companies that took previously on debt service in order to fund growth, capital investment or even to cover expenses in business downturns, no longer enjoy that option.

It’s no secret that firms are taking swift action to reduce expenses in the manner that most quickly frees up expenses, personnel cuts. Additionally, every news day features another press release touting targeted cost reduction initiatives. In many cases, urgency will drive these initiatives into the realm of unsophisticated, unit price negotiations. While short term cost savings projections will flow like honey. The long term viability of the supply base will be compromised.

Yet, for those who maintain perspective, the universe is in balance. Strategic Sourcing firms that maintain the emphasis on the strategic now have a window of opportunity to present compassionate alternatives to RIF (reductions in force) that also present long term value to the supplier and ultimately strengthen the supply base.

It’s a message that we should deliver as though lives depend on it; because they do. Strategic Sourcing firms have never seen such a window of opportunity to introduce initiatives that can serve as powerful, effective alternatives to RIF and price haggling. It’s incumbent upon those who wish to advance or even remain at the forefront of the strategic sourcing sector to deliver the message and the results.

As an old friend once told me, ‘those who do good, will always do well”. What a great time to distinguish strategic sourcing as something more than cost reduction. What a great time to do great things.

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2008 Procurement Trends - A Look Back

on Thursday, December 11, 2008

Looking back, 2008 has been one hell of a year. Markets peaked, then tanked, and left buyers, then suppliers, in a panic. Long term planning has been replaced with short term fixes, and the viability of many markets is now in question.

We’ve seen new trends pop up in 2008 due to this market instability, and We’ve also seen some old trends come back with a vengeance. This blog will discuss a few of the worst sourcing trends in 2008, and examine how these short term fixes can have a negative effect on long term sustainability.

Extended Payment Terms
One thing I have seen over and over again in sourcing this year is the move to 60 day or longer payment terms as a minimum requirement to qualify a new supplier or renegotiate with an existing supplier. Normally, this directive is handed to Sourcing from Finance, with the idea that implementing the policy company wide should buy about 30 days of cash.

Sourcing will present this requirement to suppliers, and after initial hemming and hawing, suppliers will agree to the terms, but that agreement is typically not free-of-charge. In most cases, suppliers will roll the cost of those extended terms into the base price per unit. In fact, I have overheard discussions where buyers preemptively tell suppliers just to add the extra cost into the base price.

At the end of the negotiation, the buyer can go back to management and present the new terms. Not only did they get the 60 day terms, but they now have a 2% discount for early payment. They are able to showcase their negotiation prowess, and the fact that prices just increased is normally overlooked.

This begs the question, what is more important, the cash flow, or actually having the cash? Short term, cash flow might be the right answer. But the trend to move to extended payment terms will undoubtedly continue down the supply chain, and then back up. Eventually, the customers of that original buyer will be asking for 60 day terms as well, and the effects of the initial changes will be completely negated. Not only that, but the base price per unit is now higher. Of course, we could always implement a policy of 90 day terms….


Recession Economics – Roll Back Prices to 200”X” Levels
As commodity markets and the stock market declined over the last year, I have had many conversations about price roll backs. For instance, once oil prices hit 2005 levels, I had a conversation with a resin buyer that he expects his suppliers to follow suit. Many management decisions over the last three months were based on negotiating raw materials prices across the board back to 2005 levels. Or 2003. Or even 2000.

Truth be told, in some markets, this strategy may very well be a viable one. However, as a one strategy fits all markets approach, the concept does not follow any basic rules of logic. Unless I missed an announcement by Bernanke, supply and demand, the framework of economics, has not been waived due to the recession at hand, not even as part of a bailout package.

Times have changed. In certain markets, capacity looks nothing like it did 2 years ago. Suppliers have entered the market, suppliers have exited the market, technologies have improved, and logistics have become more complex. These factors were probably all considered the last time the category was sourced, but now it doesn’t seem to be part of the equation. It is unreasonable to suggest that because the S&P is back to Pre-Bush levels, your price for widgets should follow accordingly. Hitting suppliers over the head without considering the entire supply chain may put additional strain on an already fragile market, and soon you could find yourself with even less suppliers to compete against each other.

Putting Strategic Sourcing Initiatives “On Hold”
As commodities markets went up over the first half of the year, an increasing number of my customers reported that all strategic sourcing initiatives were being put on hold while the company focused on keeping raw material costs in line and ensuring supply. By the time markets calmed down, many had also reduced procurement staff headcount, leaving less people dedicated to pro-active sourcing and other strategic initiatives.

Putting cost reduction measures on hold during the time your company needs it the most doesn’t make sense. Dealing with supply shortages and rising prices must be a high priority, but Sourcing should recognize that it’s possible to offset a good portion of raw material cost increases by effectively sourcing other categories at the same time. In addition, since your competitors are also likely to be scrambling, it’s a good time to get a competitive edge in the marketplace while they aren’t looking. As “the doctor” mentions in his blog, http://blog.sourcinginnovation.com/2008/11/07/how-dumb-is-your-company.aspx, investing, or simply not divesting, during a recession will help you come out of it stronger than your competitors.

Reducing headcount is the wrong direction, adding headcount actually makes more sense. However, dedicating additional resources to strategic initiatives when times are bad is not an easy sell to senior management. If you can’t justify spending the money, you can always add resource by hiring a PSP, which can help execute specific sourcing initiatives without the ongoing cost.

When times are good, companies will develop proactive long term strategic visions and contingency plans. More often than not, when times are bad, these plans go out the door and the finger pointing begins. This year, the housing and financial markets have demonstrated what impact shifting away from a long term strategy to improve quarterly/monthly/weekly numbers can do to the economy as a whole. Unfortunately for many companies, the lesson has yet to be learned for supply chain.

The best trends are the ones that continue year to year and decade to decade. Short term fixes are no substitute for long term sustainability, and recognizing the impact those short term fixes might have on a supply chain will ensure success once the volatility is gone.
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Lubricant Price Increases Part Two: The Tightness before the Storm

on Monday, December 8, 2008

In part one of this segment, I explained the adverse effect hurricanes Ike and Gustav had on U.S. base oil production capacity. I also took a minute to go over the definitions of the different classifications of base oils. While the dent in supply caused by the hurricanes was a major factor that influenced price increases, the storms were not the only culprit.

Before any storms hit the Gulf coast this year, U.S. base oil inventories were already quite tight. This is partially the result of the higher profit margins diesel fuel was yielding toward the beginning of the year. Oil companies had been diverting crude oil away from base production and the building of base inventories in order to process more diesel.

To make things worse, Citgo and Marathon both announced they would be exiting base oil market earlier this year. This not only caused a drop in supply, but also resulted in a loss in market competition that is allowing the remaining players to hold pricing above what would seem to be fair market value. In the “Hurricanes Sap Base Oil Supply” article from Lubes ‘N’ Greases magazine I referenced last week, an independent blender is quoted saying:

“We’re seeing tightness, yes-including the closing of Citgo’s refinery. That really hurts. More unfortunately, that let’s refiners keep base oil prices at a higher level than is justified by the price of crude oil. We’re still paying far over $4 a gallon, even with $93-a-barrell crude.”

An overall tightness from high diesel margins and a decrease in market players existed prior to any inclement weather. This tightness, coupled with the season’s “acts of God” created a perfect storm for price increases. Fortunately for blenders and lubricant customers, a natural seasonal lull generally occurs during the months of November and December. After this month, most oil companies should have had ample time to replenish their supplies of base oil and, if the logic follows, we should begin to see lubricant prices begin to fall along with the price of crude oil.

Referenced in parts 1 & 2
“Hurricanes Sap Base Oil Supply”. Lisa Tocci. Lubes ‘N’ Greases. Volume 14 Issue 11.
Wikipedia. Com-Keyword Lubricant.
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Holding On To What's In Your Wallet

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During the weeks leading up to Halloween many Americans continued their annual preparations in buying candy, pumpkins and children's costumes (see Americans Too Spooked to Spend?) to forget about the economy. In just a few short months, spending habits are changing for the December holiday season. A Business Week article, Missing This Season: A Must-Have Toy, identifies the top 5 items mom and dad are buying for boys and girls this year and number one isn't a Barbie Dream House or new video game console. Some stores are pushing their $10 toys to help ease the wallet this season along with Barbie dolls and video games (though the Nintendo Wii is still in the top 5 I haven't seen or heard about any mad dashes to the stores and waiting in line for new shipments). With saving in mind there just isn't a definitive "it" toy this year.

Not only are shoppers watching their wallets this holiday season, so are companies by canceling employee holiday parties and dinners to help ride out the bumpy economy. Just remember that the holidays aren't all about company perks and presents. If you're looking to cut costs besides presents too, there are plenty of free e-cards out there that are just as nice as store-bought ($2+) and mailed ($.42) cards. And if your a company looking to identify other ways to cut costs, a procurement service provider might be the best holiday present to themselves!

Don't let the economy this season get you down and give thanks to what you have.
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There's savings and then there's Savings

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Here are the statistics, per the US (OPTN) Organ Procurement and Transplant Network, as of Sunday at 7:45 AM:
  • 100,571 people in the US are waiting for life extending organ transplants.
  • 2,700 need a heart transplant
  • 15,941 need a liver transplant
  • 1,585 need a pancreas transplant
  • 78,082 need a kidney transplant
  • 2,015 need a lung transplant
  • 248 need some combination of the above
  • From January to August 2008, 18,659 doctors had performed 18,659 transplants
  • From January to August 2008, the OPTN recovered 9,490 organs for transplant
The issue is close to me because my father, when his heart was failing, was “too sick” to receive a transplant and because my neighbor donated a kidney to his sister just over a year ago.

In my neighbor’s sister’s case, she hit the organ donor lottery; a family member nearby, ready willing and able to help. Many are not so fortunate, and rely on OPTN to live another day, week, year or however long a transplant will extend their lives.

Still feeling puffed up about that 7% you peeled off last year’s corrugated expense? What if your performance was measure in kidneys, or hearts and lungs? Put things in perspective, doesn’t it?

We’re not saying that good work for your company doesn’t matter. Peeling 7% or any % off an annual spend does matter, it matters a lot, and even more so in challenging economic times.
But this is the time of year that our society has chosen for thanks giving, gift giving and personal reflection.

That’s why the OPTN team deserves special mention for “savings” that we can’t measure in dollars.

Now that’s procurement of which we can all be proud.
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Really XM? Are you Sirius?

on Thursday, December 4, 2008

When I signed up for XM’s new “Best of Sirius” package, I was likely in the scant minority who did it for some other reason than to hear Howard Stern recycle the same 7th grade tripe he’s been blithering for decades. When I found that Howard Stern’s act constituted not one but two of the best of a short roster of Sirius channels, I understood why Sirius was failing financially. Note to Sirius: never hang your hat on a talent-free, arrested adolescent recycling bathroom humor, making fun of the less fortunate and drooling after surgically enhanced porn starlets. Sure Stern has an audience, but he’s not the backbone of a radio network. You have to have a backbone to be a backbone, and Stern takes the short route 100% of the time. (Editor's note: this is not everyone at the Sourceror's opinion of Stern, we secretly have lots of fans here)

But I’m grateful for Stern. Not because of what he is, but what he isn’t. What he isn’t; is good enough to keep Sirius afloat. So now I get my NFL Channels. The only fault I ever found with Sirius’ competitor XM was the absence of NFL coverage.

Thus, when the news hit that as a result of the Sirius/XM merger, XM was offering a best of Sirius package including NFL coverage, I rushed to order the service. Satellite radio could only get better, right? I mean the least we could expect was a few more channels from which to choose . . . .

Caveat Listener.

Here’s what the merger gave us faithful XMers, and faithful Siriusites: less programming. But wait, there’s less. It wasn’t enough to slash the programming, the new partnership deemed fit to rename and relocate numerous old channels. So, for those who preferred business as usual, they’re paying the same subscriber rate, getting less for their dollar, and searching for what’s left. For those who “upgraded” (like me), we pay even more to get less, and search for what’s left.IN many cases, the network advertises substitutes, for former channels, that are nowhere near realistic substitutes. Unless of course you think Blue Collar Comedy is a sub for Fox News. Actually they got that one right, but you know what I mean.

Here’s the best part of the bargain. Sirius/XM pulled the prank on its customers with not so much as a whisper of warning. Nope, not so much as a mailer, a flyer, an announcement, or even a whisper.

For someone who prides himself in making sound purchase decisions, this is a real black eye for the Sourcerer. How could I re-up without so much as a little research? Here’s why. I fell for my supplier. I was so blinded by XM’s track record of excellent service, I couldn’t imagine them failing me. After all, when I needed satellite radio at 3:45 AM, and no other supplier was there for me, XM was there. When I needed 24/7 comedy, and the ability to choose between and unedited or edited format, XM was there. I never feared a shortage of satellite radio programming, XM was always stocked. And even when I needed the latest traffic updates in an instant, XM offered just in time delivery. They would never fail me, not XM!

It’s a good lesson for us all. For many suppliers, desperate times require desperate measures. The future of satellite radio is bleak right now. The future of many suppliers is bleak right now. Suppliers will take whatever measures they are allowed, and maybe some they are not. Did XM break its deal with me? I don’t know. When I bought the service over the telephone, I entered a contract I had never read. Shame on the Sourcerer.

So learn from me. Never go to sleep on a supplier, especially in troubled times. Don’t blame the supplier for trying to stay in business, and always know where you are in a deal. The fact is, XM and Sirius pulled this prank because all of their customers signed a contract they never read. They were counting on it.
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Lubricant Price Increases Part One: Stormy Weather for Base Oils

on Wednesday, December 3, 2008

Why is it that oil-based lubricant prices are on the rise even though crude oil is becoming increasingly cheaper? These products are clearly made primarily from oil, so why are the two price indices moving opposite directions? These are questions that I, along with many others in the sourcing industry, have been asking ourselves over the past few weeks. The answer: Base Oils.

While it is true that oil-based lubricants come from crude, it does not necessarily make sense that the price of lubricants should be highly correlated with the price of crude oil. This is because lubricant companies must convert crude into base oils in order to produce lubricants. Although the price of crude oil is a factor that determines the costs of lubricants, there are many other process-related factors that are driving lubricant prices.

A recent article from Lubes ‘N’ Greases magazine helped me to see some of these other cost drivers. According to the article, many of the lubricant processing facilities are located on the Gulf Coast. When hurricanes Gustav and Ike hit this region, many of Valero and ExxonMobil’s processing facilities had to be scaled back and/or shut down. The hurricanes caused a 25% decrease in U.S. Group I capacity and a 40% decline in Group II capacity. For anyone not familiar with base oil classes here is a quick explanation:

Group One Base Oils are manufactured by solvent extraction (using a solvent to separates a soluble compound from an insoluble compound). They consist of less than 90% saturates and more than .03% sulfur. They have a viscosity index that is greater than 80 and less than 120. They are the least refined of the based oils.

Group Two Base Oils are manufactured by hydrocracking (breaking complex organic molecules into simpler molecules). They consist of more than 90% saturates and less than .03% sulfur. They have a viscosity index greater than 80 and less than 120. Since almost all hydocarbon molecules are saturated, group two oils have better anti-oxidation properties.

Group Three Base Oils are manufactured by a special process called isohydromerization. They are made up of more than 90% saturates and contain less than .03% sulfur. They have a viscosity index greater than 120. These are often marketed as synthetic products, like Mobil 1 oil.

Group Four Base Oils are fully synthetic base stocks made from stable compounds of highly uniform molecular chains.

Group Five Base Oils are a separate class of base oils used for creating oil additives. Generally Group V base oils are added to other base oils to enhance that base oil’s original properties.

Each of these classes of base oils requires extensive processing. The recent storms have increased the costs of the conversion and have caused oil company’s to impose strict allocation measures. Although the storms have been a significant factor, they are not the only issue driving oil-based lube prices upward. In the next segment, I will address other relevant drivers such as pre-storm base oil inventory levels and reduced market competition.
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Sourcing Maniacs by the doc

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Special thanks go out to Michael Lamoureux (aka: the doc) for some recent coverage of the Source One and ThomasNet relationship in his popular "Sourcing Maniacs" series over on Sourcing Innovation.

Although I am not often referred to as a "Proper Gentleman", the doc's understanding of strategic sourcing, technologies and practices and his ability to effectively communicate them is second to none.

For those of you that are a bit confused about the writing style, it is a spoof of the Animaniacs cartoon that was popular in the 90s in the US. Once you get through the first few lines of a couple posts you will understand the banter and realize the creative and excellent way of delivering solid content in a ligh-hearted manner. Take a moment to read through a few posts in the series and you quickly learn about some of the most respected and top performing companies in the procurement consulting realm.

To read the Source One and ThomasNet interview, click here.

To see all of the Sourcing Maniacs Posts, click here.
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Save Quickly on Office Supplies

on Tuesday, December 2, 2008

Master Negotiator has posted a new deal this week for office supplies. This new deal, offered by Staples®, brings an average savings of 62% off of list-pricing. The first 50 customers to sign up also get a free gift card.

For those of you that missed our previous post, Master Negotiator is a new supplier cooperative website that provides pre-negotiated deals and agreements for common business spend areas, such as merchant account processing, office supplies, freight, and telecommunications.

Check out the new deal on office supplies today and see if it could help your business save some cash in these tough economic times: Office Supplies Savings
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