October 2008
The Sourceror basically took the words right out of my word document (pause to sing Meat Loaf) as the topic of supplier management was discussed in “Trick or Treat: Buying vs. Managing Relationships.” This blog will serve as the first of four posts diving into the challenges currently facing many Purchasing Managers and how to attain a happy medium with suppliers. As mentioned in “Trick or Treat,” a partnership is the most rewarding type of relationship for both parties.

Now, more than ever, many Purchasing Managers are starting to feel the pinch or have been feeling it since the summer. Sales are slow and anxiety is heavy as fewer resources become available and expectations heighten. Companies keep saying “gimme, gimme” with regards to cost reduction/avoidance and increased supplier value. The silver lining is that it is possible to achieve these demands without spending a whole lot of money or any for that matter. However, one can argue and say that time is money…oh well. The improvements may not be seen immediately, but will prove to be beneficial in the long run.

With an unstable economy and rising prices, it is difficult for many Purchasing Managers to deliver savings continuously. Their situation is complicated, but can be explained in simple terms – some individuals are forced to produce more with less, and this also goes for many who find themselves far from the world of Purchasing Departments.

The underlying problem sometimes lies in the reactive mindset. With a volatile economy, it is necessary to transition to a proactive approach. Back in July, I posted a blog titled “Quenching Your Company's Thirst” in which I briefly touched upon the topic of limited resources. We are all familiar with the phrase, “If life hands you lemons, make lemonade.” But what if you have only one lemon or no lemons at all? This is the dilemma that many Purchasing Managers are facing currently.

The perception that Purchasing Departments are costs centers and not profit centers creates the impression that no investment is needed. Better technology and outsourcing procurement services are rarely invested in them. Therefore, Purchasing Managers cannot wait for lemons to be handed to them. They need to go out and pick the fruit themselves.

Several hurdles need to be jumped first in order to become proactive and start picking. The first obstacle is headcount shrinkage. Many Purchasing Managers are swamped more than ever with tasks; and morale may also decrease as layoffs continue. The endless list of responsibilities for Purchasing Managers is also a burden as corporate strategies gear towards more centralized sourcing rather than plant purchasing. The importance of establishing standardized processes is also stressed as standardization allows for better communication across all departments.

Several more challenges exist when we take into account globalization. In my next installment, I will venture into the global economy’s impact on Procurement. Stay tuned…and Happy Halloween.
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For those of you that follow multiple blogs in the procurement/spend management/strategic sourcing space, here is a great reference page to help you get a snapshot of all of the top blogs currently in publication: http://purchasing.expertpage.net/

The page might take up to 30 seconds for you to see, but it aggregates the most recent 5 postings from each of 15 top procurement blogs. Rolling over a post with your mouse will also expand out the first few lines of the articles/posts.

I am not exactly sure why this site was set up (as it has no visable revenue model) but it appears that Robin Titus of Portum (IBX) put it together, and it is a great quick-reference tool that I thought I would share.

Thanks to Mr. Titus if you are reading this.
While suppliers are most likely to deliver the message of “supplier value”, it’s incumbent upon savvy procurement pros to optimize the value of every supplier relationship. Too often the link between the pre-sale and post sale “value proposition” breaks once the order is placed and companies get back to business as usual. If anything, the recent financial trends in business scream for something more than business as usual however.

A veteran of 100’s of corporate environments, the Sourcerer has seen client supplier relationships that run from barely interactive order to cash cycles, to highly integrated strategic sourcing. We pause at the use of the buzz word partnership, because a true partnership includes a level of business intimacy rarely seen in business. Yet client supplier relationships that approach or at least include components of partnership are most likely to reach optimal performance.

The dividing line is often in how hard a client is willing to train a supplier to serve them. This requires a key partnership fundamental, trust. Firms must invite the supplier in to learn the components of their business that need supplier support to be successful. They need to develop a plan to integrate suppliers into their business and invest the time and effort to educate suppliers on how to function seamlessly within their environment. It’s important that they manage expectations as well, delivering clear and concise requirements that suppliers are enabled to meet. For some firms, firms that have already embraced the mindset necessary to optimize supplier relationships, this is business as usual at least on some level or in some areas. For other companies, the idea of training the supplier to succeed is as foreign a practice as dealing in wampum.

For those firms, it’s time for a fresh approach. Changes in the world market, both recent and not so recent, have left many businesses scrambling to survive. Contracting demand has made squeezing every last bit of value out of every dollar not a mantra but a mandate. The battle for survival and prosperity, as always, will go to those who achieve and maintain competitive edge. In order to maximize value, firms must optimize supplier relationships. That may require change, not only in process but also in company culture. Firms that have kept doors locked and information close to the vest will need to refresh their mindset. The era of functioning in a company vacuum has been ushered out by the information age. While it remains true that only business partners are actually partners, even the least complex buyer seller relationship is ripe for some level of supplier management. Buzzwords aside, supplier management is more critical than ever.
Broadband competition is heating up as Comcast, America’s largest cable operator, announces an initiative to double bandwidth in many of its larger metropolitan territories, allowing the provider to better compete with Verizon’s FiOS offering. This is not only great news for consumers, but could also represent an infrastructure shift for many small and medium-sized businesses that do not have the budget for full blown, redundant, national private networks.

Many firms still need to replace old infrastructure. They are overpaying monthly recurring and usage charges on old ISDN BRI circuits as their backup or even their primary network connections to HQ. This type of infrastructure is costly and slow. Satellite offices failing over from their T1 or fractional T1 onto an ISDN circuit may be no better off than they would with no service at all. On top of that, many companies may be paying for T1’s where they could be paying much less for much more bandwidth, given that the site’s connectivity is less than critical.

In a related blog post about WiMax, I outlined how new wireless technology could change the way businesses look at their Wide Area Networks. That shift in conjunction with ever-increasing bandwidth speeds coming from big players like Verizon and Comcast could lead to increased savings, better performance, and higher quality network redundancy for many small and medium-size WANs.

The beauty of the broadband market is in the diversity. WiMax (wireless), Cable (coax), FiOS (fiber optic), and DSL (landline) all run on different media. No longer is your ISDN or DSL backup running on the same pole from the same telephone company point of presence as your primary T1 line. Failing over to a different type of service could mean less risk if a pole should go down within the last mile of your location. A few words of warning, however: diversity is not guaranteed except in the wireless realm, and provider private network circuits get the highest level of priority in the event of a failure. Despite this caveat, some low priority locations would certainly qualify as candidates for redundant broadband solutions, using a VPN to connect to HQ, versus private line connections to a provider cloud. An out of service condition on multiple infrastructures is highly unlikely and the savings potential is tremendous. Again, wireless will be the true game changer, but a world of options is becoming available for IT departments willing to invest in the research and effort to bring up and manage a location on a non-standard platform.

I’ll wrap things up by invoking some thought on potentially huge savings that will, again, add value to the network as a whole. Thus far, I have only focused on remote locations, but what about HQ? Many networks centralize Internet connectivity, allowing many sites to share a single high bandwidth Internet circuit such as a handful of bonded T1’s or a DS3. In some instances multiple, redundant, always-on, Internet circuits are configured, load balanced, and shared among all remotes. A less expensive alternative would be a dormant backup circuit brought into action by a failure on the primary. Why not load balance or failover to a 50Mb Comcast or FiOS circuit for a small fraction of the price?

The ideas laid out here may not be a reliable enough option for many companies but for those on a tight budget that does not allow for proper backups or any backups at all, solutions are on the way!
Not when it comes to Halloween items this year. Even though most Americans are trying to cut back and become more frugal with their money, many are letting loose on Halloween costumes and candy for trick-or-treaters. The National Retail Federation has predicted that sales related to the holiday will rise to $5.7 billion.

With Halloween only one week away and the economy puttering along, some thoughts may be “those Saw movies aren’t scary, our economy is.” With that being said, the economy is one of the main reasons why Americans are splurging on Halloween goodies. They want to forget about the economy and the election for one night, celebrate the holiday and enjoy themselves. This year, Halloween happens to fall on a Friday so some may be forgetting more than they were expecting to. However, it’s not going to be easy to fully escape the fact that this is an election year. There are going to be little kids and adults alike dressed up in McCain and Obama costumes everywhere you turn.

Another reason why Halloween sales are not suffering is because parents cannot deny their children a costume. If they do so, their actions will come back to haunt them. Children don’t forget something like that very easily. Many households also enjoy welcoming trick-or-treaters at their door, as it is estimated by The Nielsen Company that more than $1.9 billion will be spent on candy this season. It is difficult not to meet children’s expectations when they knock on your door wishing you a Happy Halloween.

So, if you are ready to pull your hair out over the economy or find yourself stressed about your decision in ‘08, take your mind off of everything and carve a pumpkin. Another alternative is to put a mask on and go trick-or-treating and then eat chocolate all night long. Not that I’ve ever done something like that. I’m considering going to see the fifth installment of Saw and leaving the scares at home.
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Educational institutions such as the University of Phoenix and others have made getting a Bachelors or Graduate Degree more accessible than ever before. It only make sense that advanced business credentials would be available on line as well. Sites such as nextlevelpurchasing.com and onlinepurchasingclasses.com now offer online purchasing classes and certifications for the procurement professional with a tight schedule. The University of San Francisco offers a 1000 Online Master’s Certificate in Supply Chain Management. It’s an excellent way to expand one’s academic and business credentials without a commute to class. While it’s important to check the credentials of every institution, most will specify whether or not a course or curriculum is recognized by a leading organization or trade association (e.g. ISM)
A CNNMoney article entitled Mass layoffs highest since 9/11 caught my attention. The government reported we are at the highest levels of mass layoffs since September 2001. It seems large firms are focused on cutting costs by cutting headcount first. Unemployment claims increased to a staggering amount and is the highest level since the wrath of hurricane katrina (I notably use a lowercase "k" as she does not deserve the rights of a human name).

I digress... while companies rapidly increase speed in reducing hours and jobs, they really should explore other options to retain quality employees. If only there was a way to scream from a mountain top, "There ARE other ways! Come check us out!"
That’s right Boy Wonder. Third party procurement is gaining traction.

If the constant push to enhance productivity wasn’t enough, recent market events will have businesses looking harder than ever to do more with less. While 3PP (3rd party procurement) has established itself as a sound option to reduce tactical/administrative spends, the move to expand the scope of 3PP partnerships has begun. Perhaps the best statement of this trend is the growth of 3PP teams within industry leaders IBM, Accenture and Ariba. As is the case in today’s rapidly evolving business climate, those firms that move first and best will gain competitive advantage. What was once seen as a risky strategy is now presenting itself as the sensible alternative to less efficient internal processes.
If the 25% drop in gas prices from summer has you breathing a sigh of relief, that exhale should be a call to action. It’s time for procurement professionals to make certain that they receive the benefits of the recent price movements just as they have shared in the pain. This doesn’t just apply to petrochemicals, or NG chemicals driven by comparative economics. Plastics and other purchases with considerable freight costs are targets for price reductions as well. Those who don’t already have their purchases tied to market indices would be wise to invest in doing so now. If you have questions about how to get the ball rolling, contact the Sourcerer.
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With year-end fast approaching, and some of the most dynamic market turns in the last 75 years at hand, annual budget forecasts are as difficult to create as they have ever been. Fortunately, there are tools and intelligence available to smooth out the bumps in what has been a very bumpy ride. While it’s always best to invest in sophisticated tools and analytics to produce the optimal forecast, here are some tips to muddle through if you don’t have those tools at hand.
  • Bifurcate fixed price and spot buy purchases
  • Establish a detailed, 3-5 year, history of purchases with allowances for new and obsolete sku’s
  • Determine a realistic period for spot buy forecasts, short term (e.g. 90 day) may be the best possible scenario
  • Investigate historical and market pricing trends for finished goods and feed stocks for use in predictive pricing
  • Gather predictive data (e.g. “forward” contracts) on finished goods and feed stocks for use in predictive pricing
Fixed price, or contract buys are relatively less difficult to project in that costs should remain stable. The application of the above is particularly germane in establishing more realistic forecasts in spot/non-contract purchases.
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In a few short weeks, the business climate with which we had become accustomed was no longer. America and the rest of the world are faced with the greatest crisis of financial confidence since the Great Depression. Recent turns in the financial industry are producing dramatic changes; reckless lending and speculation have resulted in “pennies on the dollar” sales of major banks and investment firms. Stock markets are plummeting. Bail outs have yet to have an impact. Without question, this is an uncertain and frightening time for many. Shifts in financial markets, like many other dynamics of change, will present a unique challenge to supply chain management.

The immediate impact of credit freezes may result in hardships to businesses small and large. Firms whose cash reserves are modest and may have relied on loans to purchase inventory or even make payroll are faced with difficult choices. Suddenly, suppliers who may have established a sterling record of dependability might struggle to meet order commitments or lack the personnel to process and deliver in a timely fashion. Stock outs and extended delivery cycles are on the horizon.

Dynamic shifts often result in dynamic, sometimes polar opposite, responses. Some supply chain managers will, no doubt, scramble to replace struggling suppliers immediately. Others will express their loyalty by hanging in to the bitter end. Neither response is in the better interests of sound supply chain management. The savvy supply chain manager will see these dynamic shifts as an opportunity to enhance supplier relations and better prepare for rough waters ahead. To that end, consider the following:
  • Investigate suppliers carefully before making transitions. While the rumor mill may be telling you that a supplier’s failure is imminent, and rumors often have weight, sound relationships merit informed decision making.
  • Direct and penetrating communication is your best asset in determining your suppliers near and far term viability. It’s often the case that fear and uncertainty result in decreased communication. Those who do not shrink from addressing tough issues will be ahead of the curve in responding to evolving supplier capabilities.
  • Pulling the plug on a valued relationship can have a rebound effect. Firms can quickly establish a business reputation as being capricious or even disloyal.
  • Patience and understanding now can result in leverage later. Procurement often turns a kind eye to suppliers who have given special consideration or expanded service under unique circumstances, even paying a premium for those benefits. It’s reasonable to think that suppliers will be so inclined for customers who are patient and understanding through tough times.
  • The current climate represents a unique opportunity to justify increased and expanded sourcing events. Establishing qualified alternative suppliers is critical to avoiding extended order cycles or even interruptions in supply.
While the hard dollar shifts in business represent serious challenges for all of us, we need to keep in mind that every challenge represents opportunity to gain competitive advantage. It is critical that supply chain managers remain undaunted by the emotional impact of an uncertain horizon and proceed with the vision of a strong supply base in the future. While the dynamics of financial changes are clearly measurable and quantifiable, the drivers behind the changes are, in many cases, emotional. Those who leverage change as means to tackle supplier interactions with clear, precise communication and work to expand their supply base will enjoy the benefits of enhanced existing supplier relations and a more robust supply base as well.

There’s no question that supply chain managers have some rough waters ahead. As always, the best sailors will manage to navigate the smoothest possible ride.
You can't get away from it - credit crisis, falling financial markets, bankruptcies, job losses......... Addiction to credit and greed got us here. Withdrawal is painful.

The world has fueled the fire for years with easy credit. We ate it up buying consumer goods and enjoying the best quality of life on the globe. Financial executives got monster bonuses. Asset values exploded. We moved from one inflated bubble to another. Now there is no where left to go. No more bubbles. People are hoarding cash; if they have it.

Foreign governments are in a quandary. Do they cut off the drugs (credit) from their biggest customer who can't afford to pay? If they do, it will hurt them too. If they don't, the debt will continue to get bigger. Will we react irrationally when the supply is cut off? Will we use military action to continue to get oil and consumer goods?

How painful is withdrawal? Very. Dow 4000, 3000? More job losses. Global depression. Things will get worse before they get better.

I speak to many people that are frozen. They don't open their 401K statements when they come. They are trying to continue with business as usual. Don't maintain the status quo like AIG and Lehman and watch things go down the drain.

What can you do? Take action. Reduce your reliance on credit. Cut costs. Shore up your balance sheet. Be in a strong position when things hit bottom. There will be a lot of opportunity for people in a position to take advantage of it.

Source One has been helping leading organizations to reduce costs through Strategic Sourcing for over 15 years. Call us. We can help you weather the storm so you are prepared to strike when things bottom out.

What actions are you taking to weather the storm?
As BPO (Business Process Outsourcing) gradually gains traction, the make/buy decision continues to present itself in less traditional areas. One such area is a subset of BPO, KPO (Knowledge Process Outsourcing). Long past the era of diminishing returns for process re-engineering and personnel rightsizing, businesses are looking yet again to improve efficiency as a means for productivity gains. Training and the entire learning management process is quickly ascending to priority status in organizational development as a key element in enhancing per-employee productivity.

While KPO is in its nascence, firms should not ignore the opportunity to both enhance employee productivity and reduce costs while doing so. There are some hurdles to evaluating the benefits of KPO, as there are in any expense category. While firms can measure the reduction in hard costs and even soft costs, it’s difficult to ensure that outsourcing will produce a comparable benefit to that produced by internal resources. One can measure yield from training theoretically using learning/experience curve models, such as Bills’ or Wright’s, and these models have been validated by academia and industry. Researchers have used learning curve theory in measuring the limits of software development cycles as well.

Yet evaluation of the actual benefits of training is anecdotal at best. It appears that the post-mortem processes of training events are widely varied, subjective and lacking the hard metrics (e.g. testing) to evaluate the benefits of an event. Thus, measuring the cost of a widget, or even cutting a paycheck is far more evolved than post-event survey feedback that “the cookies were stale” or “the room was too bright”.

Yet with ever-increasing business dependence or workstation and infrastructure technology and coinciding training requirements, a process that was once seen as non-essential is crucial to everyday operation. The emergence of the CIO position in major corporations gave birth to training stewardship if not measurement. In many organizations, where technology and soft skills development are seen as operationally critical, even strategic in some operations, the CLO or Chief Learning Officer now stewards the knowledge process. With heavy investments in the tools and training necessary to enhance productivity through knowledge based initiatives, it behooves organizations to develop sound metrics to measure the relative value and effectiveness of the training investment. With these metrics in hand, organizations can gather, analyze and evaluate the data in order to optimize the investment.

Thus, the make/buy question wends its way back into the discussion. Of course there will be the instant objection that organizations can not measure something so subjective as learning. Even if that were the case, there are other hard metrics that serve as decision drivers in the make/buy of Knowledge Processes. Specifically, one can measure the cost of full time staff versus outsourced training. Typically, significant cost benefits are available in any form of non-core process outsourcing. Better still, part-time, contract training may further reduce costs, if carefully managed. Training firms typically use an average of 60% utilization of in house training resources as the cost case to outsource. While a 3rd party KPO may not yield the 40% savings one would think should be possible, it’s not unreasonable to think that 15-30% hard dollar savings are there for the taking in either outsource scenario. Additionally, there are 3-5% soft cost savings available, based on US DOL estimates for administrative costs per employee for small to large corporations.

It appears then, that the bogey in KPO equation is “quality”. Specifically, will your employees receive the same or better quality of learning experience from an outsource resource than they would with internal resources? Organizations will likely recoil at the loss of control over the program. As is the case in most outsourcing agreements, much of the quality issue is addressed by industry specifications. One such specification in technical and soft skill training is the courseware. Courseware, like fasteners or floor mops is produced by a short list of usual suspects and an array of specialists. As a result, organizations are empowered to control “quality” through the selection of courseware. Where the risk, if any, lies is in trainer selection. Courseware being equal, trainer selection is the key factor in the trainee’s qualitative experience.

One must consider though, the benefits of KPO trainers versus internal staff. It stands to reason that KPO trainers, in that training is their core business, will be more industry savvy having escaped the single institution vacuum. They’ll likely be better prepared to deliver the most current knowledge and possess a higher level of specialized knowledge in a given application, unlike their internal “jack of all trade” competitors. In essence, the same rules that apply to Business Process Outsourcing apply to Knowledge Process Outsourcing. It seems sensible then, that organizations seeking to optimize their training investment look hard at the benefits of Knowledge Process Outsourcing as a means not only to reduce costs but also to enhance employee productivity and ultimately, remain competitive.
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It’s a common decision made in every part of every company every day. With the continuing presence of competitive demands forcing business to enhance efficiency, Business Process Outsourcing is expanding its reach beyond tactical functions. While the hard and soft dollar benefits of transactional process outsourcing are well documented, and often a no-brainer when considering outsourcing, businesses are already addressing the value proposition of outsourcing procurement, and in many cases handing over portions of their supply chain management to outsource resources.

While firms have been open to, if not eager to, handing over complicated tactical spends such as MRO and Telecommunications, the relatively low dollars in these spends (when compared to direct materials) typically represent modest bottom line gains. At the same time, top dollar, direct material/upstream spends remain the holy grail in procurement and executive regimes. When considering what’s at stake from the sales side, it makes sense that businesses have approached direct spends with great care. Nonetheless, the raw numbers make a compelling case for new methods in direct material procurement. When one considers that businesses have long been willing to engage consultants for recommendations on direct material purchases, the option of outsourcing the entire business process is not at all far-fetched.

The dividing line between paying for advice and actually outsourcing the function is the solitary issue of control. While control takes many shapes; e.g. cost, quality, service-level, R&D, it is ultimately the issue of management having to answer for its decision making. One can clearly see the discomfort in having to answer for the decision making of an outsourced resource. The fear of having to answer for the micro-decisions that spring from a macro-decision can be daunting. But, as costs continue to rise and price pressure intensifies and non-core spends are maximized, the arrow will eventually find its way to direct materials.

It is important then, that top management consider that the same efficiencies that apply to tactical spends, apply to strategic sourcing as well. Outsource resources will uncover economies of scale, they will leverage technology, they will enhance rather than sacrifice expertise, and most importantly they will not function in the preconceptions found in the “single business vacuum”. While a direct material outsource relationship will require a more intimate connection than indirect material sourcing, the benefits will merit the investment.

The crucial element to such a partnership is a many touch, “no surprises” format. 100% commitment and adherence by outsource firms to move strategically, only with prior consent; will ensure the advancement of direct material procurement from a make to a buy proposition. While businesses have been reticent to turn over the direct material procurement business process, the benefits of well executed outsourcing are incontrovertible, and the move to include direct materials is merely a logical extension.