September 2008
A large publicly traded mining and minerals processing corporation was searching for ways to preserve profit margins in the face of general economic turmoil and rising supply costs. The company enlisted the services of Source One to help them leverage their spend and consolidate contracts across 44 locations in North America.

It turned out that Source One was also able to develop creative solutions to current sourcing problems, improve reporting, and elevate the client’s level of spend visibility in roughly fourteen MRO categories.

Through a combination of the introduction of competition, utilization of strategic relationships with supplier conglomerates, and extensive negotiations, Source One managed to produce an average annual savings of 14%. Furthermore, the sourcing effort helped the client company's managers hone their plant purchasers' ordering, inventory, and reporting methods.

For each product category, the client, various suppliers, and Source One worked as a team to develop and implement an effective change management program. Source One’s implementation efforts, which are included in the company’s pay-for-performance cost model, also provided the client with the resources it needed to get all of its various plant managers on board and up to speed. Source One also audits the client company’s purchases monthly for compliance to help ensure the program’s success.

Source One accomplished the initiative's primary goal of creating cost savings without any major disruption of the client's business processes. More than this, Source One provided the client with the tools, insight, and relationships necessary to continuously improve their sourcing procedures. As a result of this sourcing initiative, the client company is enjoying cost savings as well as better reporting systems, strengthened supplier relationships, and elevated control over total spend.

Full Case Study:
How much do you need? $700 billion. OK, what will you use it for? I'm not sure. Is $700 billion enough to solve the problem? I can't say.

Did you hear we had the largest bank failure in US history?

Sounds surreal doesn't it. This stuff is actually happening. What is it telling us?

$700 billion is not enough. More banks will fail. If history is any indication, things will get worse before they get better. How should purchasing professionals prepare themselves?

Now it is more important than ever to have deep visibility into your supply chain. In How Much are You Betting and What are the Chances of Losing, we discussed a methodology to determine the likelihood that one of your suppliers is in danger of failure. As the financial crisis spills over into an economic crisis, some of your suppliers will not have the financial capability to survive. The news will come as sudden as the bank failures. The word is that WaMu executives were on a plane when the government sold their company to JPM. Insiders didn't even know it was happening.

Don't wait to react, like the government and banks did. Know your suppliers. Know your supply chain. You know what's coming. Prepare for it during the 3 month window that is left. Even if the government passes the bailout this weekend, this is not the bottom.

What do you see in the tea leaves? How are you preparing?
A former client once told me that I was qualified to be a consultant because:
a) I was from out of town
b) I had a mustache.

I shaved my mustache not long after that. While my friend used humor to communicate one of the stereotypes attached to consultants, most did and still do not make light of the consultant’s presence. A predisposition against consultants is a major factor affecting the success or failure of a “3rd party” engagement. The fact that many procurement consulting engagements are top down driven makes it all the more critical for project teams to identify, address and break through relationship barriers.

It’s been said that “only when the student is ready, can the teacher appear”. Yet, it’s entirely possible that procurement will meet being handed a top-down cost savings initiative, with deep reservations about having its historical results challenged and eventually enhanced. So if the student is anything less than ready, how can the procurement consultant ensure success?

First, the consultant must establish a candid and direct relationship with procurement. It is crucial to address the issue of “legacy” honestly and with compassion. Most every worker is proud of the results they produce. Having their work checked is bound to create discomfort and likely, fear. Since procurement is hired to deliver the best total cost solution, what vested interest would they have to prove that they haven’t done so? The consultant must consider the answer to that question carefully, raise the question honestly and answer it compassionately. Yet the answer is much more than a simple phrase.

The answer is in making procurement an equal partner in a new “legacy”. A major barrier exists between internal and 3rd party resources because of emotional issues such as “legacy”. That barrier will either be strengthened or broken by the degree to which a consultant enlists procurement in the success of the project.

Procurement may also harbor suspicion about the consultant’s desire to deliver a lasting result in a “temporary” engagement. One of the most common reservations of procurement is that the consultant does not have a vested interest in anything but cost savings and thus, will “hitch them up to a nag”. It’s important that the consultant address the “quality and service” issue not just with discussion. The consultant must build a detailed requirement that not only drives the sourcing event, but also enhances the client’s discovery of the supplier base, the qualified products, the service /delivery levels, the R&D backing and the technical support to bolster the transaction.

Another fear that often presents itself is the illusion of “expert” status. This is present in the individual or team that feels their history in sourcing is tantamount to expertise in a given market, category or specific commodity. While breaking through that illusion can be challenging, the results merit the work. This is where the consultant must delicately balance massaging the ego in procurement while delivering the truth about the perils of repeating the same processes with the usual suspects, in a vacuum. The skilled consultant deftly navigates procurement into an enhanced sourcing event much in the same fashion of assuaging the legacy issue, but this time crafting more of a master/apprentice persona for the relationship. By making procurement the ostensible driver of the process, the consultant can successfully enlist their support. It’s best to package the project path as the logical outgrowth of the expert’s expertise.

Numerous other issues arise with any procurement consulting engagement, too many to list here actually. Do you have a question about how to effectively partner with an organization, or an anecdote to share? If so, please send them the Sourcerer. See you next time.
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This is part of Sourcing Innovation's cross-blog series.

As a good friend once said, “that ship has already left the harbor”.

It’s the perfect metaphor for the globalization of a peak functioning supply chain. You need look no further than the Wal-Mart model to see a corporation capturing the benefits of internationally integrated supply. International supplier integration has gone from innovation to competitive necessity in what seems like the blink of an eye. With the benefits of rapidly advancing technology and the virtual marketplace a global supply chain that once existed for only the “500lb. gorilla” is extended for all companies to access. The benefits can yield eye-opening cost savings, expand access to supply and thus improve a firm’s ability to stay competitive.

Although few said it sounded too good to be true, at least a few of us thought that way or maybe knocked on wood when pocketing cost savings ranging from 20-60%. Sadly, those savings are shrinking or even disappearing in light of the most recent oil shock and the resultant adjustment in world petroleum pricing. With overseas shipment costs rising by as much as 170%, and some carriers slowing speed by 20% to conserve fuel, unit prices have escalated and delivery cycles have stretched.

Yet the effect of petro-economics is only one component of the international sourcing equation. Other challenges have presented themselves and will continue to be factors in the decision to integrate international versus domestic suppliers. These challenges, along with others that arise, make international sourcing one of the most complex choices procurement will be managing for the foreseeable future.

Consider the following:

Currency-Currency values must be included in evaluations, especially where long delivery cycles are involved. Procurement Managers may not make anyone forget George Soros, but they must be savvy to the impact that currency values play in international purchases. The relative strength of the dollar versus foreign currencies, excluding the euro and pound, has made currency moves an economic subtlety up to now. As the dollar gains strength against the Euro, however, is it possible that doing business with American buyers becomes less attractive to Euro zone sellers?

Quality-Without question, a supplier audit in Minnesota is a good deal faster, less expensive, and easier to arrange and execute than a supplier audit in Malaysia. Equally important, a firm’s ability to return unsatisfactory product and time to receive replacements goods is significantly enhanced through purchases from domestic supply.

Redress-Unlike the distributor 30 miles away, suppliers in the virtual marketplace are not governed by the same laws as we are. Getting redress for unsatisfactory products and services can be dicey. Granted it’s always in the best interest of supplier to satisfy the customer. But when one considers the costs, the time investment and the potential for success, the leverage of legal action for supplier non-performance is hardly the hammer we’re used to here at home.

Trade Barriers-Delays in customs are still common, with shipments often sitting for days or even weeks. New rules and practices are constantly evolving. Foreign governments are weighing the costs and benefits of barriers to trade just as we do. Some, such as China, have already taken action.

Political (In)Stability-It’s typical to consider the Middle East, or Venezuela as areas whose political instability threatens to interrupt supply at any moment. Yet political instability exists in numerous Asian countries and Euro-zone (and nearby) suppliers as well. It only takes one coup to shut the door on international commerce for a country.

Natural Disasters-Earthquakes in Indonesia, Sumatra and Japan, tsunami’s in Thailand and Peru, a Cyclone in Myanmar, and those are just in the last five years. Granted, North America is not isolated from disasters either. But domestic disasters have taught us that the supply chain is easily interrupted. Procurement must become savvy not only to trends, but the tactics necessary to manage the effects of disasters on our international suppliers.

Ultimately, these drivers and others (e.g. corruption) make international sourcing a complex and evolving supply strategy. It’s incumbent upon procurement to evaluate every supplier choice not only on the supplier’s merits, but also the factors mentioned above and any other exogenous variables. The explosion of virtual commerce and an ever expanding supply base have demonstrated tremendous benefits to firms struggling to remain competitive. At the same time, supplier choice and integration are a more challenging and potentially risky proposition than ever before.

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Boeing subcontractors may be a little relieved. About 27,000 Boeing employees decided to strike this past Saturday after their expectations were not met in a new three-year contract. Suppliers will receive a bit of a cushion and should seize this opportunity to analyze supply chains, ramp up production, and perform an overall assessment of their operations. One of the underlying reasons for Boeing’s 787 Dreamliner being behind schedule is due to suppliers not being able to deliver their components on time.

The longer the strike lasts, the longer customers will have to wait for a finished product. The only party with time on their side is suppliers; that is, if they are behind schedule. One company, Spirit, is actually cutting back the hours of its employees who have been working on products associated with the 787. The company, having already experienced a Boeing strike a few years ago, is making every effort to avoid negative repercussions from the strike.

Some blame the strike on Boeing’s approach to its outsourcing. Boeing is producing its 787 with 70% of its components being delivered from outside suppliers. Many of Boeing’s contractors are located in different countries. It is no surprise that the plane is behind schedule and employees are upset. Employees fear that eventually 100% of Boeing’s planes’ components will be outsourced. Boeing should have planned accordingly, analyzing the risk involved with such a major part of their production relying on outside sources.

For many companies, outsourcing has provided for a bright spot on financial statements. The spot is not as bright for those companies who have been forced to recall products due to flaws in their outsourcing process. And now, Boeing may be starting to regret its outsourcing approach. For more details on the strike, take a look at the following article: “Boeing suppliers look for strike's silver lining

Companies who are looking for opportunities to save but do not wish putting themselves at risk by outsourcing production can generate savings at no extra cost to their bottom line. By reaching out, or to avoid the use of jargon, by making a phone call to a procurement service provider, savings can be realized in direct and indirect categories.
Every year it gets worse. The Jargonistas coin another phrase or two. Turn a few verbs into nouns, and euphemize language that was already just fine to begin with. Why? I haven’t a clue. Maybe they “don’t have a lot on their plates”, or feel the need to re-engineer their verbal processes. Anyway . . . .here are a few of my favorites with some commentary.

“TQM/Total Quality Management”- It’s one of those terms that begs the obvious question. What were we geared for in the past, Partial Quality Management?

“Added Value” -I just love this one. New, for 2009! We’ve finally added some value. Those value-less years are behind us now!

“Reach Out” -Back in olden times, we didn’t reach out for anyone, unless we were falling off a ledge or out of a tree. Now, reaching out is the choice “euphemism” for making a phone call. Maybe I’m naïve, but why would we need to soften up the phrase “call you”?

“Value Proposition”-“Why you should buy from us” used to be plenty good, but not anymore. Just remember that the bear trap is waiting in your path. If you haven’t any “added value”, you have no business stating a value proposition.

“Just in Time” (Delivery)-This is a crafty stretch by salesman (because the term is intended for manufacturing) so that they can charge a premium for timely delivery. I suppose we should all be thanking them for rescuing us from the dark days or “a few days late delivery”, “it could be a while” delivery, or the dreaded “what’s your company name again?” delivery.

"Vertical Integration"-Someone is in charge

"Horizontal Integration"-No one is in charge

“Proactive”-Maybe the best example of unintentional overkill, ever. It means, literally, that the person taking action was in favor of taking action. It is not the opposite of re-active. We already had that word; “active”.

“Process Re-engineering”-this was Jargon’s darling for a decade. I just have one question. If a team of engineers designs a bridge, and then fifty years later, a team of engineers designs a replacement bridge. Do they need degrees in Engineering, or re-Engineering?

“Business Readiness”-this is 2nd generation Jargon for the now, too harsh, Change Management. How I yearn for the good old days, when “firing the dead wood” was in vogue.

“Best Practices”-This one makes sense in a perverse way. Who wants to say “this year we’re gonna try doing it right”, when we can say “leverage best practices”. No shame in that!

“Face Time”-Once upon a time, a meeting was a meeting. But miracles of modern technology have made the word “meeting” an opaque concept. “Face time” now implies an actual, “in person” encounter. Still, it makes me laugh. I can’t help but ask why not say “time with you” instead of “face” time. Like there’s an option . . . .leg time perhaps, or maybe shoulder time?

"Heavy Lifting"-This is what white collars call their actual work in order to make it sound like work.

Multi-tasking-Maybe the most irritating phrase ever voiced. It’s a weak attempt at explaining to others that one can do many things at once (poorly).

“Mission Critical”-We used to say important, or God forbid, just “critical”. But Mission Critical; now that’s got a real James Bond feel to it.

“Offline”-means “later”. As in “we’ll talk about it later”. Needless to say, the first time someone said “offline, what does that mean”?; and the other party said “later”. The “offline” cover was blown.

“A lot on my plate”-Kind of cutesy metaphor meant to give real life meaning to “I have a lot of work to do”. Wait . . . doesn’t “I have a lot of work to do” have real life meaning?

“Think outside of the box”-another fave, coined to explain the complex, even abstruse concept of being creative. This phrase relies on Einstein’s revolutionary theory that creativity can only occur in unrestricted dimensions. The formula C=EM2, where C (Creativity), E (intellectual Energy) times M (I can’t believe you’re still reading this) 2.

Okay, you get the point. Have any favorites of your own, and comments to add? Send them to the Sourcerer . . . .
This week, and Source One have released "Contract Manager" as part of the FREE Purchasing Tools solutions available to all users of MyThomas. Contract Manager is designed to help businesses get a handle on all contracts and agreements that they have throughout their organization.

Contract Manager offers:
  • Automated alerts of contract expirations - keep you informed of upcoming contract renewals, never miss a contract renewal date again!
  • Quick access to new and old contracts - keeps you from searching through knee deep files.
  • Store, track and retrieve all your vendor agreements for secure and long-term accessibility.
  • Upload original documents and find critical info such as: contract start/end dates, terms and conditions, signatures, deadlines, pricing and non-disclosure details.
  • Allow read-only access to owners, colleagues, and legal departments for convenient reviewing procedures.

Start using the tools for free today.

Read more about Contract Manager here.

A few days ago, we had the pleasure of discussing Source One and its contingency-based strategic sourcing business model with Jon Hansen over at Procurement Insights.

Mr. Hansen wrote a decent summary of the procurement outsourcing space and why Source One is different.

You can read it here: "Source One: The Thinking Professional's Solution"
During the last two weeks I listened to both Democrats and Republicans talk about change as if they created the idea. I thought "Change for the Better or Change for the Worse"?

This weekend I watched Oliver Stone's "Born on the Fourth of July". If you haven't seen it, watch it, if you have seen it, watch it again - great movie. The one thing you realize is that nothing has changed in 40 years. We are still fighting a war against an invisible enemy - then it was Communism and now it is Terrorism or Al Qaeda. As the Republicans spoke about how the surge was helping us to win the war, I thought: When we win, what do we get? Will terrorism or Al Qaeda be gone? After all, people are the thousands.

I used to think of the United States as a world leader and now I wonder who we are leading and where are we going. We are still setting records - deficits, foreclosures, commodity prices, mortgage name it. People fight for right to life so we can kill people in wars. We spend billions to fight aids in underdeveloped nations so we can exploit them. Do we really need to argue over gay marriage, a woman's right to choose or evolution? Don't we have much bigger fish to fry. Is there only one side, one political ideology or one religion? If so, which one is it?

My hope is that change means that we will become a world leader in promoting peace. Our leaders top priority should be to open a dialogue with every political and religious leader to find a way to live in peace. After all, have we learned nothing, are we that primitive that we can't find a way to get along? Hopefully, Obama or McCain are up to the challenge.

After World Peace, our leaders should focus on Prosperity, Affordable and Available Health Care, National Energy Plan and Social Security for our seniors that have worked their whole life. Only by prioritizing and focusing will we accomplish anything. These same issues have come up in every national election for as long as I can remember and we have accomplished nothing.

Sure, these are tough issues to tackle. They need to be dealt with. That is what we need leaders for. We don't want our leaders distracting the nation with social and religious issues or steroids in baseball. Leave those issues to the states or leave them behind closed doors so people can deal with them in private. We all have the right to the "pursuit of happiness". Find your path and let others find theirs.

The Feds need to focus on the big issues. They need to pull together the best minds and lead us to solutions that will provide a better future for all.

So, hopefully our leaders will establish priorities and focus on accomplishing them. They may not be the priorities that I have outlined above, but if we accomplish something then we will not be talking about the same issues in another 40 years.

What do you think? What change do you want from this election?
no image reports that Dell Inc. could possibly sell all of its production plants within the next eighteen months. Dell is in the process of negotiating with contract computer manufacturers to outsource what might end up being 100% of its production operations.

After missing analysts’ second-quarter profit estimates, managers of the world’s second largest maker of personal computers feel that outsourcing production to third-party manufacturers will provide the company with the flexibility it will need to compete in today’s market. An analyst from HSBC Holdings says, “As the company moves away from its direct sales business model, it needs to offer a wider range of products and respond more quickly to market demand.”

This scenario exemplifies just how much a market can change over time. In the not-so-distant past, Dell was praised for its production dexterity. Since Dell specialized in customized, just-in-time manufacturing of a narrow line of products, the company was able to give consumers computers they wanted without having to hold large inventories. This approach was gravy back when everyone wanted this particular product line. Even Dell’s ad slogan, “Dude, you’re getting’ a dell” represents the company’s former position in the marketplace. At the time, the purchase was a no-brainer. Now, however, in a market with exponentially growing product offerings Dell needs to reshape its business model and widen its focus.
I stumbled upon a press release the other day, regarding pending litigation in which the US Government is being investigated for unfair procurement practices that have potentially cost small businesses up to $640 billion in lost opportunities in the past ten years.

The article itself is filled with more abbreviations and acronyms than even a programmer could understand, but here is a quick summary: The press release alleges that public servants, in an effort to get what they wanted (or perhaps out of laziness) have disregarded typical higher costs for goods or services and have been influenced in their decisions in selecting a “preferred supplier”. The article summarizes that the procurement habits of these procurement servants was unethical because they drafted the bids to include ‘unique’ or ‘patented’ features that were directly related to the preferred brand or supplier they wanted to engage with.

Although it appears that nothing much is being done on a government level, a relatively new organization (founded in 2005), “Fairness in Procurement Alliance” has sprung up to help the issues come to light. This advocacy group is attempting to partner up with the University of Florida Center for International Policy with the goal of getting the government and entrepreneurs in the private sector to address this procurement crisis.

Anthony Robinson, President of the Minority Business Enterprise Legal Defense and Education Fund said, "the government lacks viable vehicles to prevent procurement abuses, enforce the penalties on the book and reward small and disadvantaged businesses when they win their protests. We need to involve entrepreneurs in the solution to the procurement crisis." The goal of this new partnership is to help foster this view and hold the government more accountable for abusive procurement practices.
Most of us are not surprised when we see news articles like this, especially if you have spent any time at all working in the government sector as a consultant. In my short time in that sector I saw many government RFPs that went out that specifically included criteria that would eliminate all other potential bidders except for the incumbent vendor.

However, this problem is by no means unique to the public sector, although usually procurement individuals at private businesses are not doing it out of laziness or lack of ethics. As consultants looking in we still see plenty of proposals that float out the door that only have one possible result, and that is to hire back the incumbent or the company that originally pitched a product or solution to the company. A perfect example of this is anytime you let an existing or potentially new supplier write your RFP for you. See “Don’t Let your Suppliers Write Your RFP” for more on that.

But most often it really is not the “fault” of the procurement department. In many situations, the procurement individual is just ordering what they were told to order, for example, the engineer in the shop tells them that they need a particular gasket for a particular machine and it can only be ordered from this one particular company. How is a procurement person supposed to challenge that, when it would require not just a political battle, but also an engineering degree? Or, the most common thing we see is that “We have always ordered that part, I am not sure why.” In other words, you really need to dig in to the products and services you are buying, and completely understand why you are buying them and how buying them came about. Often we find that a product is over-specified because of an old design that the product originally evolved from, or because an old engineer that worked there at one time wanted to order the part from his dad’s shop.

The moral is, procurement should not function in a vacuum as its own entity and businesses must do a better job of supporting the procurement function to a point that goes beyond different departments just telling procurement to buy something for them. The most successful procurement teams are not seen as a department, but rather a resource extension to every department within a business. Or, if the internal politics are just to much for your procurement team to take on, consider forming your own "advocacy group" by reaching out to a procurement service provider to help you uncover potential opportunities.
With prices at the pump finally starting to ebb, it’s hard to accept the reality that we’re on tropical storm away from another ride on the petro-roller coaster. Yet the price dynamics of the last few years foretell just that type of volatility. Still, we are burdened with reliving our past as a result of our efforts to forget the pain of the last oil shock and the one before that, and the one before that . . . . It appears that Americans are at the whim of the market when it comes to the impact of petroleum prices on raw materials down to finished goods. As the world’s top per-capita petroleum consumer, we are every bit the junkie depending on their next fix simply to get through the day. The gas station is our street corner; the pump stand is our pusher, and all the product prices in the petroleum universe are driven by the pull of our addiction. So why bother? And the answer is . . .why not bother? What was that I hear about addicts curing what they can cure?

While it’s a fact that some components of unit cost are beyond our reach, some components are positively within our reach. One can bifurcate even the most volatile purchases into two categories of cost; fixed costs and variable costs. That’s the first step in how to crack the code of index driven prices to ensure to that while commodity dynamics (variable costs) may be unavoidable, fixed costs can in fact be managed. For those who doubt the notion that petroleum base stocks and finished good prices are non-linear, consider the immediacy and scale of price increases at the pump when oil prices inflate, and how much we get back (and when) they decrease. I’ll bet my house and car that the movements are not only non-linear, but rarely reflect inventory depletion as well.

Thus, the “how” of attacking petro-economics is basic; in one manner of thinking. The vast preponderance of purchasers who can’t manage variable costs, can work to manage fixed costs, and stabilize profit margins. The astute application of a market based index however, requires a sometimes detailed understanding of plant economics. For instance, one gallon of raw crude does not a gallon of gasoline make. Hence, the non linear price equation. Just like every cardboard box has a raw material cost component, a labor cost component and a capital cost component, so does a roll of stretch wrap. Depending on a firm’s volume and frequency of stretch wrap purchases, it may behoove the astute purchasing professional to explore the plant side economics necessary to bifurcate fixed and variable costs. While this approach appears rather complex for a typically downstream purchase such as packaging materials, a relatively small investment in time and money could yield a solid tool to control costs where they can be managed and ease the overall sting of petro economics.

If you would like to learn more about the fixed and variable approach to price control and sourcing, please contact Source One.