Make/Buy? Where's My Dinosaur Hat?

on Wednesday, July 29, 2009

“First of all, I’ve been doing this a lot longer than you guys have, and there’s no way you can do better than I can. As a matter of fact, I could teach you guys a thing or two about how to reduce costs”.

Nope, the Sourceror didn’t make that quote up. It’s from an actual meeting with a client contact just a few weeks ago. But it gets better folks, really it does.

“So that said, if I know I can do the work myself, why would I use your company and share the savings, when I can produce the same results for the company without paying you a fee?”

Well, that’s not as insulting, anyway, it borders on a business question.

So despite my intuition to ask the fellow “what’s your problem buddy”? or “how’d you get this job right out of the alligator training academy”? I sat still and played nice; although it took some discipline.

After all, this super-duper cost-cutting VP of HR (yes, I said VP of HR) had posed the million dollar question; the make/buy question. Many clients, rational, reasonable, not those who sing “I can do anything better than you can” ad infinitum, clients ask the make buy question. It’s a sensible, legitimate question any responsible shepherd of company assets would pose when considering the addition of a 3rd party resource.

It’s also the old school question. When I hear that question, I want to reach into my Sourceror's bag and pull out my dinosaur hat. Then I’d put the hat on and ask “guess why I’m wearing this hat”. The client would respond “I dunno, why?” and I’d say, “because as long as we’re thinking like dinosaurs here, I want to look like one”. I know, I’d get the gate in a lot of instances, but that’s why it’s a wish, instead of a strategy.

But the thinking holds true, because make v. buy is investigation than is required. Make v. buy relies on a monstrous multi-part, assumption upon which Mr. VP HR stakes his self fulfilling reputation.

What Mr. VP HR is relying on is that he will be able to produce the same level of result, as quickly, as efficiently, and as effectively as the 3rd party resource, because unless he can do that, make v. buy is out the window. And here’s the best part; if he “had time”. Any of us who’ve done the work we do know it’s only available to us because the existing internal resources don’t “have time”, right? He asked with a wink.

But at least that window of excuse for Mr. VP HR opens the window to the real discussion. The question is not “make v. buy” anymore, so much as it’s “what will produce the optimal result?”

Mr. VP HR’s examination is not so much a question of what’s the best investment for the company, of he’d be analyzing the decision from an output perspective, rather than a ‘me v. you” perspective. In the new paradigm the assumption that an career HR guy, one who dabbles in cutting benefits to employees every few years as his legacy for cost reduction, is likely not the best choice to optimize costs across an entire company. As a matter of fact, he’s not the best choice in any paradigm. The decision to put resources to task should never be a “we v. they”. It’s a best available athlete, best cost, best output evaluation.

So when faced with that line of questioning, you may not need to put on your dinosaur hat, but you should at least tell your clients that you have it ready.

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What On Earth Are We Waiting For?

on Tuesday, July 28, 2009

Last Monday, celebrations were held to recognize the 40th anniversary of the United States’ first mission to the moon. Many individuals acknowledged NASA’s accomplishments, but some may have found themselves posing the question above – what on Earth are we waiting for to travel back to the moon? Others may argue and say we are waiting for the recession to blow over…let’s take care of our troubles on Earth before we venture back into space. Well, no matter what side you are on, it is important to note that the last manned mission to the ball of cheese was nearly 37 years ago. NASA needs to be either rejuvenated or extinguished. Tapping into the private sector and engaging alternate suppliers may help keep the agency alive.

NASA was created in 1958, shortly after the U.S. launched its first satellite, Explorer 1. The federal agency’s sole reason for existence is to explore the heavens. Its only goal after its formation was to catch up to the Soviets and beat them to the moon. We all know it as the space race, when the two nations tried to prove who was most superior, scientifically and militarily. Once the U.S. won the race, NASA’s direction dissolved; and although there were additional trips to the moon and back, no real advancements were made over the years.

In the prime of the 1960s, when every child’s dream was to be an astronaut when they grew up, NASA’s annual budget was $5 billion. A decade later, it dropped to $3 billion. NASA did not have a vision after its greatest accomplishment of landing on the moon. Discussions were had on going to Mars, but when the budget shrank, the possibility of traveling there did so too. Today, NASA’s annual budget is equal to less than 1% of the federal budget, estimated to be around $18 billion.

NASA’s most recent efforts have been focused on the Constellation project, a costly plan to build a new fleet of rockets and space capsules as the space shuttle nears retirement. Due to NASA's reputation of having a short-term mindset and being mission-oriented, recent steps have been taken to assess the agency’s current capabilities and future goals. Taking into account NASA’s annual budget and the costs associated with building the new fleet, this assessment is necessary in order to figure out how to keep the agency afloat. Lockheed Martin’s former chief executive, Norman Augustine, is heading up the commission created to conduct the evaluation. Investments in research and development and pursuit of the commercial sector are the two main avenues the commission is exploring as potential opportunities for NASA’s new direction. Hopefully, the results of the review will be motivating. If so, NASA’s exploration plan may seem some major adjustments.

NASA’s engagement of the commercial sector is the first step towards legitimizing its existence. An article I came across in BusinessWeek titled Commercial Space Flight: NASA May Get Onboard discusses the possibility of NASA tapping into the private sector for help in lowering its costs associated with the international space station. This article states that two companies, SpaceX and Orbital Sciences have received $500 million to “see if they can develop technology to deliver cargo to the space station. The two companies need to prove their capability with three demonstration flights by the end of 2010. If they’re successful, NASA will pay each company $1.6 billion to run 12 cargo missions to the space station through 2015. The $133 million cost per flight would be less than one-third NASA’s cost for such missions.”

There is more potential for cost savings if NASA conducts a full strategic sourcing initiative. This would not qualify as your typical strategic sourcing project. Potential suppliers cannot simply be engaged and then selected based on their proposal and capabilities and further negotiations. As the WSJ article, Space Program Struggles for Direction, suggests, it gets much stickier with all the “contractors, lawmakers, interest groups, and even parts of the Pentagon maneuvering to benefit from possible program changes.” Many people are concerned with protecting the jobs at Boeing, Lockheed Martin and other major suppliers.

The U.S. will maintain the international space station through 2016, and it remains to be seen if the station will remain after that year. If NASA were to select a commercial supplier who can carry both supplies and astronauts to the international space station and deliver significant savings, the greater the possibility is for the space station to remain after 2016. Elon Musk, chief executive of SpaceX notes, “If you look at any other mode of transporting goods and people, on planes or trains, most people would say that these things should be done by the commercial sector.”

If the private sector is pursued, costs will be lowered and more money can then be pumped into R&D. NASA’s current budget makes it difficult to invest money into the research and development of technological advancements. The most important step for NASA is to transition itself into having a long-term outlook and an overall vision for the agency. If more money had been pumped into research and development in past years, the costs of the new fleet could have been significantly lower. NASA has not been continuously innovating itself. It has been standing still for quite some time and it is going to be difficult to get the agency moving again.

After exploring the topic of this article more in depth, there seems to be a great deal of opinions floating around regarding NASA. Many think the agency should be extinguished, while others think it still serves a purpose. Some things to keep in mind is that it is really up to the government as to how they see NASA fitting into the overall future of our country. Is the agency delivering any type of value to us as citizens? If we begin to see other countries investing the money to explore space, we may follow suit and be required to make a decision about NASA’s future. History may repeat itself. There is also the possibility that the potential changes to NASA’s exploration plan may lead to an even greater delay in getting us back to the moon.

We’ll just have wait and see how the stars align for NASA.
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Speculation Time - The Future of LTL

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The well publicized financial troubles of Yellow Roadway Corporation (YRC) have brought into question the future of the LTL market. However, after months of speculation and turmoil, YRC has seen a few big wins in the first half of 2009.

First, YRC was able to hold off a Q2 EBITA covenant with creditors and negotiated a 10% employee wage reduction with the teamsters union. As of last week, an additional 5% wage cutback was in the works, as well as an 18 month pension freeze that would save up to $900 million.

Next, YRC was able to push back $83 million in pension payments until January 2010, using the company’s real estate as capital.

YRC also completed the integration of Yellow and Roadway in March of this year, a milestone the company believes will provide accelerate month over month operational efficiencies and bottom line improvements.

Even with these changes, the economy is still hurting, with no real recovery on the near horizon. Without a major uptick in moves, it is unclear if YRC’s recent wins will keep the company viable or simply delay the inevitable.

So who stands to gain from an LTL market without YRC? Right now YRC companies have about 23% of the market share, according to the March issue of Logistics Management. FedEx Freight comes in second with 14%, followed by Con-Way at 9% and UPS Freight at 6%. On the face, it looks like the remaining big three have the most to gain, and they are already looking for ways to distinguish themselves from the rest of the pack. Examples:

FedEx recently implemented a guaranteed Next Day before 10:30 AM expedited service, similar to their offering in the small parcel arena.

UPS announced improvements in standard transit times for over 1,000 lanes Southeast and Southwest.

Con-Way introduced capped pricing on large LTL shipments. No LTL shipment will cost more than a truckload shipment in the same lane – a major beef for many shippers.

The United States Postal Service is also eyeing entry into the LTL market on a national basis, as the low cost (and low service) alternative.

That said, there is currently excess capacity across the board, a trend that is likely to continue over the next few months. Much the way DHL exited the U.S. market without any takers on their domestic business, with so much capacity available, it is unlikely any of the major players will look to pick up YRC in total - should they fail. However, YRC is really a network of many regional carriers, so look for profitable segments of the company to split off or get absorbed.

Regardless of what happens to YRC, look for terminal closures and extended standard transit times at a national level in the near term. Expectantly, shippers will begin to reconsider their one-carrier-fits-all approach and turn (back) to regional players such as Southeastern, Pitt-Ohio, and New England Motor Freight, that can provide shorter transit times and a lower cost, but do not have a national presence. Overall, these Regional’s and Super-Regional’s have the most to gain, as it appears the national market can only absorb a certain number of major players providing the same basic point to point options, transit times, and costs.
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When a Philly BigBelly is a Good Thing

on Friday, July 24, 2009

You would think this title refers to the city full of belly fattening, but oh-so-good, foods like cheesesteaks (my vote is Tony Luke’s and apparently Marc Summers’ vote also since I sat one table from him two Sunday’s ago), cannoli’s and soft pretzels… but you would be wrong.

A 6abc.com article yesterday boasted Philadelphia as having the largest implementation of BigBelly solar trash compactors which in turn will reduce trash collection trips by 75%. The city estimates it will produce a savings of $875K per year with the 500 compactors purchased by state grant monies to help reduce the $1.4 billion, five-year budget deficit.

Others have instituted these compactors but not nearly in the numbers as Philadelphia and whole collection routes. As I read through the article, I thought to myself “well if this reduces collection rounds I hope they didn’t overlook what happens to the employees!” Philadelphia has their total cost of ownership covered. The change in collection frequency helps 25 streets department employees fill household recycling truck vacancies as said by Streets Commissioner Clarena Tolson. Also, in Sommerville, MA the targeted approach of placing these compactors in densely packed areas has freed up workers to repair pot holes, trim trees and fix playground equipment according to Michael Lambert, director of transportation and infrastructure.

BigBelly Solar, based in Needham, MA is really on to something when cities are looking to reduce their deficits and spend less as a whole without having to lay off workers. Way to go Philly! Mmmm, now I want another cheesesteak hoagie wit whiz.
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Be Prepared

on Thursday, July 23, 2009

Over the past few years as a consultant I’ve learned to take on the well-known Scout Motto, “Be Prepared”. It is important to gather your thoughts and have researched the supplier’s company ahead of time when making that initial call to a supplier on behalf of the client. You wouldn’t go fishing without bringing your line and bait right? Of course it also helps as you learn the ‘big picture’ of the industry at hand.

I believe it was some guy (you know who you are) that said the more confident you are in the conversation the supplier may volunteer more solid information to help aid the sourcing process. Personally, the more knowledgeable about the topic of conversation, the better the results will be in most cases. Showing the supplier you did your homework and came to the game prepared makes for a good relationship foundation and may help both the consultant and supplier on future client’s sourcing needs.

Even if you don’t have the answer to that one minuscule question the supplier throws your way, calmly assure them that you will get the answer and respond back to them promptly. You still prepared yourself to take charge and follow up as needed. That’s one more piece of information you’ll be prepared with for the next fishing trip!
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The carbon/silicon conundrum

on Tuesday, July 14, 2009

As consultants, we’ve heard it too many times. Firms run to invest in the latest greatest tool that will:

  • Collect, store and manage all the data
  • Ensure a smooth interface between user and system
  • Ensure a smooth interface from system to system
  • Create 100%, real-time visibility
  • And of course, reduce costs!

Later, when the software is paid for, and the dust settles. We meet them, we’re tempted, but stop short of asking, as Dr. Phil would ask; “so how’s that working out for ya’?”

We try not to ask questions for which we already know the answers. But they’re going to tell us about it anyway.

One complaint is that they spent a fortune on software, then an even bigger fortune on implementation, only to be left with a bolted-on product that was retrofitted to support the processes they were trying to replace.

Another complaint is that the new software simply refuses to function with the legacy software.

Another complaint is that no one really knows how to use the new software.

And so on, and so on . . . .

You think they’d learn that AT&T banked on “the system is the solution” mindset. We all know how that worked out, don’t we?

But let’s not do the easy thing and blame the software folks. Truth is the software is just fine. It does exactly what it’s designed to do, or pretty close anyway.

As the techies tell us, it’s “a user issue”. Actually, it’s a carbon unit (people) issue. The carbon units that buy and use the software often forget one key consideration. Or maybe they’ve been lulled into a false sense of security by software salesman.

After all, when was the last time a software salesman said “no, the software won’t do that, you need a person for that”. Ok, they do say that when there are dollars to be made bolting systems onto systems and modules onto modules. But when it comes to functionality . . . .the SAAS (software as a service) rap is de-rigueur.

So the moral to the story is this. It’s not a software issue, it’s not even a user issue; it’s a planning issue. There are plenty of great products out there, all of which produce the exact outputs for which they’re intended. But a thorough analysis of how a company will get to those outputs, and the inputs required from the yet to be defunct carbon units. Companies must accept that software still supplements and enhances the efforts of humans rather than replaces them. True, software removes many of the non-value functions once performed by humans, but it has yet to replace creative/abstract thought, business savvy or intuition. So at least for now, the carbon/silicon conundrum is not an either/or proposition. Software is a tool, better thinking, planning and reaction remains the solution.

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The Supplier Stall Game

on Thursday, July 9, 2009

As a consultant that helps companies reduce their cost of goods, I find that many suppliers try to avoid me. That’s understandable – some of consultants out there don’t do what they say or say what they do, or even try to consider the suppliers requirements/business needs. Most suppliers have war stories about bad experiences with these types of consultants. I like to think that my company is an exception to that “bad consultant” rule, and feedback I get from suppliers at the end of an engagement normally confirms it.

That said, some suppliers have taken avoiding consultants to an extreme and incorporated avoidance into their standard business processes. I suspect many even train salespeople on the “avoidance process”, because within the same organization I see different salespeople using the same tactics over and over again.

I would like to give examples of two suppliers that utilize this practice and note the similarities and differences in their approach. The first, Supplier A, is a well known small parcel shipper, and the second, Supplier B, is one of the major domestic office supplies distributors.

Supplier A has been in the stall business for years. When a consultant initially contacts the sales rep as an agent for a mutual customer, Supplier A will do their best to avoid the request for meetings and information for as long as possible, sometimes up to a month. The goal here is to see if this is a serious process or a fishing expedition.

When the supplier finally realizes the consultant is not going away, their next step is to put an NDA in place. The NDA is a fair way for Supplier A to protect their interests, and I take no issue with it. However, getting a copy of the NDA can normally take over a month, with numerous requests just for Supplier A to send the file, and excuses such as “we just made changes and I need an updated version from legal” or “I haven’t been in my office this week to get the file off of my computer”.

The next step is getting the NDA signed. The NDA that Supplier A sends over will leave gaps in certain sections, including the term of the NDA and the purpose of the NDA. These sections are left for the customer to fill out. Once you add and send the changes back, they need to go to Supplier A legal for approval. The process of getting approval for changes made in sections that Supplier A purposefully left blank can easily add two weeks to the process.

Finally, an NDA is signed. It may take an additional 3-4 weeks to coordinate meetings and get the reports we are asking for. Fair enough, but at this point Supplier A will actually honor their commitment and work with the consultant. Not so for the new player to the stall game, Supplier B.

Supplier B is relatively new to stalling (in my experience) but I believe they are following some examples from Supplier A in how they run their “patterns”. The process of getting the supplier engaged will again take several weeks, and the NDA process several more. A notable difference here is that in most cases, the supplier will refuse any direct contact with the consultant, and instead traffic all information through the customer. Keep in mind the customer has typically hired a consultant because they don’t have the time. Supplier B’s goals here are clear – keeping the customer as the middle man will either slow down the process or frustrate the customer enough to simply give up. It also opens up the envelope for all types of misunderstanding that happen when two parties that need to work together have a “gatekeeper” passing the information back and forth.

The biggest difference between Supplier A and Supplier B, however, is what happens after the NDA is signed. As I mentioned, at this point Supplier A will normally engage. Not so with Supplier B - they will continue to stall to whatever extent they can. Information will still be passed through the middle man, and timeline commitments go unmet. The relationship, which becomes increasingly adversarial, only improves when elevated above the primary sales contact within Supplier B’s organization.

All the tactics used by Supplier A and Supplier B can be effective in holding off the inevitable – a true evaluation of their total value offering to the customer. However I have never seen stalling successfully end an engagement, which is the true goal of the approach.

Here are a few things for suppliers utilizing the stall strategy to keep in mind.

First, if you pride yourself on customer service, you need to find a more creative solution than stalling to use when dealing with consultants. In many cases I have seen the stall tactic put that supplier in an unfavorable light with the customer, and in the final analysis, loyalty is lost.

Second, you might not be seeing the forest for the trees. Suppliers can go through great lengths to protect existing business while ignoring the opportunity for growth that a consultant’s involvement brings. Sure, you might have 50% of the customers business, but if 50% more is available you have a lot to gain (I did that math in my head). Not only that, but a consultant typically has many other customers and similar projects that they can bring a supplier into, depending on how this first interaction goes.

Third, while the supplier was probably brought in by purchasing, administration, or some other department, the consultant is typically brought in at the C-Level. The consultant has visibility within the organization and political capital that many suppliers can’t compete with. Does it really make sense to piss them off?

Finally, just as not all suppliers are created equally, not all consultants are created equally. Before you take the stall approach do some research. Have other sales people within your organization worked with this consultant before? What has their experience been? This may be your opportunity to get the exposure you were looking for within the customer organization, and an advocate to improve the business relationship. Not all consultants’ value long term sustainability and good customer/supplier relationships, but some do. It may be a challenge, but in the long run you might have more to gain than you have to lose.
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Fireworks or Workers Fired

on Tuesday, July 7, 2009

That was the mentality of the mayor of Lowell, Massachusetts, who cancelled the city’s fireworks display as a result of an $18 million budget gap and 48 layoffs this year. The New York Times explained that the city’s show would have cost about $45,000, equivalent to one full-time job. “If we hadn’t cut off the fireworks, we would have had to lay off 49,” said Bernard Lynch, Lowell’s city manager. Lowell had a lot of company this year as many cities and communities struggled to find room for the boom in their budgets.

Shows that depended solely on money from sponsors were cancelled simply because sponsors pulled their support. The money was just not there. Numerous other cancellations were a matter of respect for workers that have been laid off. Many communities could not rationalize the need for fireworks while putting its residents out of work.

Many other cities and towns, however, still found ways to make their shows go on.
In many cases this summer when communities had cancelled their shows, residents or local sponsors stepped in to donate the money needed. Several cities always try to top last year’s display, but that was not possible for some this summer. Just having some sort of show was worth it. By cutting back the length of a show and having fireworks linger in the sky longer, residents could still enjoy the displays and probably not notice the difference in length. Neighborhood associations also took the initiative to provide their own displays if their cities did not.

Several communities who provided 4th of July events were preparing for bigger crowds as towns close by cancelled their events. One show in Seattle was cancelled because its sponsor said there was too much competition from neighboring towns, and the sponsor did not want to invest the money. The sponsor instead donated the money to a cause that will last more than twenty minutes or so – a local charity that feeds the hungry.

Julie Heckman, the executive director of the American Pyrotechnics Association (APA), the leading trade association of the fireworks industry, makes a good point in saying, “with travel and tourism on the decline due to the economy, ‘home town celebrations have never been more important to bring communities together, give them hope, and restore optimism.’”

I agree with Heckman for the most part. I went without fireworks this year not because of my town’s tight budget, but rather its bad weather. Sure, it was disappointing because fireworks displays are a great tradition, but there are worse things than going without a show on the 4th. A fireworks display is an expensive luxury. A huge chunk of the expense is allocated to the cost of police and firefighter support to ensure safety during a show. Two very unfortunate accidents over this year’s holiday, totaling five deaths, prove the importance of such safety measures.

Overall, the fireworks display industry has not really suffered this year. Sure, some adjustments were made to meet the needs of consumers, but the demand for fireworks still endures and always will. Even though some cities cancelled their shows, the loss has been somewhat balanced out by the increase in fireworks shows at events like MLB games. Also, it is possible that more backyard fireworks were purchased this year as a result of communities cancelling their shows. According to the APA, backyard fireworks have more than doubled since 2000. In 2007, usage was up to 238 million pounds compared to 2000’s 102 million pounds.

There’s a time to save and a time to spend, and decision makers are held responsible. They must always keep in mind that there is the chance that a spending decision could end up being a dud.
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Payment Terms and Supply Chain Risk

on Monday, July 6, 2009

I was somewhat surprised over the last few quarters as buyers went to their supply base, normally at the request of the Finance Department, to extend standard payment terms from 30 days to 60 days. I was even more surprised at how quickly that request changed from 60 to 90, and eventually 120. So what comes after 120? Frequently, a Chapter 11 filing. But Chapter 11 isn’t always an issue limited to the customer – in a lot of cases, the supplier that accepts these terms will be filing as well.

The problem is, in most industries extended payment terms are unsustainable, at (almost) any price. Add dried up credit markets into the equation, and what you are dealing with is a supply chain recipe for disaster. Of course there are industries where 120 day payment terms are acceptable, or even the norm, but in a standard distribution relationship this is not the case.

Suppliers that are hurting will take on business at extended terms – they need it on the books. But viable suppliers - companies that truly understand their cost of doing business and how cash flow risk affects their bottom line - won’t accept the change. They would rather walk away from business than take the hit to cash flow and profitability. Over the last few months, I have found that the way suppliers respond to these requests have been great indicators of their financial strength.

So what does this mean for your supply chain?

First off, if you need to extend terms with distributors, it probably means your company is having cash flow issues. But in the long run, extending terms is like putting a band-aid on a gaping wound. It’s not going to fix the core problem – your sales dried up and you don’t have the cash to pay the bills.

If it has to be done, there are several approaches you can take, but the worst scenario is when Finance issues a universal mandate – all suppliers must accept 90 day terms. The one size fits all approach is going to put suppliers on the defensive and some will drop you as a customer all together.

Figure out which suppliers have the shortest terms and the highest bottom line impact in terms of spend. Present the request to them as a temporary change – and be sure to put a time limit on it. If they are still reluctant, try to substitute extending terms by using a p-card. The supplier gets paid in a timely fashion and you get another 30 days of cash flow (if you set it up right).

If you are in the position of requesting extended terms and your supplier won’t agree to them (even with a substantial markup of price), there is still reason to be thankful – this supplier will probably still be around next year.
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