January 2010
A recent article in the Parcel Industry magazine discussed UPS and FedEx’s determination to banish the third party consultant involvement in negotiations; “FedEx and UPS claim they want to deal directly with their customers, reasoning that consultants don’t know much about the shipper’s business”.

Is it the consultant’s continuous success in achieving savings or the potential loss of business that threatens these packaging suppliers? Michael J. Ryan, Vice President-Sales Marketing for GENCO, expresses that each customer should make their own decision as to whether “using a consultant is in their best interest”.

Of course... Why do businesses hire consultants in the first place? The consultant offers its customers purchasing strategies, best practices, databases of price points and processes that are effective in achieving competitive and qualitative contracts with its suppliers. The goal is not to “beat up” the supplier or make them look bad.

Pushing the third party player out of the picture will only encourage the following:

1. Lengthy decision making processes on behalf of the shipper
2. The ongoing need for formal RFQ’s when contracts expire and tariffs change
3. A lack of trust…is this the best price? Will the competitor offer something better?

I agree with Michael that with ongoing rate increases and market shifts, “we must continually challenge this strategic move by FedEx and UPS to minimize the impact of RFQ’s and contract re-negotiations”.

Can’t we all play nice!
In my last post I reviewed the importance of Market Intelligence (MI) to supply chain managers, and also discussed some of the different types of MI. In this post, I will review typical ways to collect this information.

A simple example of MI would be a commodity report that detail plant capacities for steel production. Organizations that make steel-based products will use these reports to determine which mills to buy from and forecast future costs.

The importance of market intelligence is the example above is easy to see. Without commodity reports, managers would find it difficult to predict supplier outages, budget for price changes, or know when to hedge.

However, real MI is much more complex than this example. Working in a vacuum, an individual supply chain manager may have access to this information. But what if there are conflicting numbers? What if this information is outdated, or markets have changed since this report came out? What if the truly relevant information for this supply chain manager isn’t factored into this report?

The manager might recognize these issues, and supplement their commodity reports with updates from suppliers. Surely the supplier will have their finger on the pulse of the industry, and can provide me with more up to date information if needed. In many cases, supplier updates will come during quarterly lunch meetings, or even more likely, a phone call to a supplier right before a major report or budget is due. The interesting thing to note is that suppliers are likely getting their information from similar reports. If a manager’s goal is to corroborate information, the likelihood is the supplier input will match the input of a commodity report. If their goal is to triangulate their information, getting different input from different sources and seeing how they correlate, than more information is still needed. So where else can you get it?

One good source is industry publications, and I break these up into two types, buyer and supplier. An example of a buyer industry publication might be Parcel magazine. This publication is tailored to those that utilize parcel services, basically, customers of the industry. A supplier publication is quite different. These publications, which focus on the supplier as their readership, are great to find insider information or general industry information that your supplier may not share with you. It’s also a great way to better understand your suppliers business. Electrical Wholesaling Magazine is a good example of a well written supplier-focused industry publication.

Another good source of MI are Subject Matter Experts (in-house or outsourced). Many companies will hire former sales or operations people from their supply base and bring them in as category managers. If they still have access to the same networks they can provide inside information that is not readily accessible through publications.

The outlets described above (commodity reports, industry publications, SME’s) are all the traditional ways to collect market intelligence. Most companies will utilize one or two of these methods to collect MI and stop there. However, none of these methods take into account the fluidity of markets. Markets are dynamic, constantly changing, and to keep your finger on their pulse requires constant, real time, data refreshment.

Real time market intelligence can only come by through constant market gathering and analysis of market information. Most category managers will learn something new each time they go through a sourcing event, but constant active market sourcing is not feasible (if you want to maintain any good relationships with suppliers). This is where the use of more dynamic or non-traditional data collection methods come into play, normally by collaborating with resources outside the organization. In my next post, I will review how to collect dynamic market intelligence.
As many of you may have heard and seen in the news, Toyota recently found that many of their most popular models produced within the last few years had a major defect. The defect is related to the accelerator sticking and is something that they have been researching for a few years now. This defect has resulted in Toyota having to recall over 2.3 million vehicles. For years Toyota has been a name synonymous with quality and safety. With this detrimental blow to their reputation Toyota is likely to continue to see a major drop in sales and shareholder value.

What’s my point you ask? As the article’s title indicates, “Toyota’s reputation takes a huge hit”. Reputations in business are crucial to succeeding no matter what the industry. Lifelong Toyota supporters may be inclined to think twice about repeat purchases and those considering the brand for the first time might just reconsider. Mistakes like this inflict a domino effect of problems for the organization involved. Look at the recall of the arthritis drug Vioxx from Merck and the effect that had on sales for the company. Merck is still facing lawsuits and settlements related to the 2004 removal of the drug from the market. Merck will have to continue to defend its reputation for years to come, just as Toyota will need to rebuild their reputation.

On a lighter note, Source One has a good reputation for obtaining savings for companies of all sizes in many different categories. Categories range from telecommunications to office supplies and from utilities to small parcel, plus much more. Source One’s subject matter expertise and experience help us to achieve strong relationships and excellent results.
So, you are in the market for some Strategic Sourcing Consulting Services, but you don't have a budget set aside? No problem, Contingency Based Strategic Sourcing may be the answer for you. However, when you engage a provider, or evaluate your RFP responses, there are a few things that you need to watch out for.

The Strategic Sourceror's parent, Source One, is a procurement service provider, founded in 1992, that focuses on Strategic Sourcing. The majority of our customers often choose to engage Source One on a contingency basis (so there are no fees for services unless and until savings have been achieved). In this economy, the contingency model has been hot, to say the least. With procurement departments cutting staff and savings targets that are larger than ever, contingency based strategic sourcing consulting services are a model that fits well into just about any business. Over at Spend Matters, Jason predicts an increase in Sourcing and Supply Chain Consulting for 2010. He also points out that the contingency model is doing well, and more and more providers are attempting to move into that space.

What is Contingency Based Strategic Sourcing?
Simply put, contingency based sourcing consultation agreements are contracts with a sourcing consultancy in which the work will be performed exclusively on a gain sharing model. So, the end goal for both the consulting firm and the engaging company is to maximize cost reduction (and in some cases, cost avoidance) while maintaining the same or improving levels of quality of goods or services that are procured. Contingency agreements will typically bill at a percentage of savings dollars resulting in the success of the project for a period of time defined in the contract. Contingency agreements can encapsulate anything from one-off capital expenditures to ongoing indirect spend or even strategic mission-critical direct spend categories.

What to watch out for while sourcing your sourcing providers:

The Bait and Switch
This is one of the most common things we see with contingency based Procurement Service Providers, and is one of the most important things to look into when going through your vendor selection process. Make sure that the firm you engage with can provide backgrounds on the individuals that will actually be working on your projects. Many providers are simply franchises in which anyone with a few thousand bucks in their pocket can buy into, without having any serious qualification criteria. These franchise players have impressive websites, extensive client references and superior sales teams, often consisting of seasoned professionals in exactly the commodity areas that you are looking for help with. The trouble is, the team you meet in the sales process is not the team that will be working on your engagements. They hand the work off to local franchises, outsource the work, or give the work to the most junior resources within their organization, which ultimately ends with mediocre results. The people that you are introduced to in the sales process should also become your contacts throughout the life of your engagement.

Can The Provider Support the Model?
How long has your proposed supplier been proving a contingency model for? If they are reacting to market demand and just recently released the offering, chances are they have not yet perfected it. A contigency based model requires an enormous upfront investment by the service provider, as they are in fact providing their services and resources for free until savings can be achieved. If a provider is not experienced in this type of model, and does not have the financial strength to support it, they would be motivated to assign their lowest cost internal resources to the engagement and close the project as quick as possible in order to see some return on their investment. This of course will lead to mediocre savings for your organization.

Are They Getting Paid on Both Ends?
Find out how your perspective sourcing provider is truely being compensated. Many providers are simply agents or resellers of a variety of suppliers. They will find you cost savings off of your current price, bill you for their work, but also collect a fee from the supplier as a commission or "finder's fee". Sourcing providers that are collecting revenue from both ends inherintely have a conflict of interest that will always push their recommendation for their clients to the maximum revenue potential for their own organization. This is especially true in areas such as telecommunications, where it is relatively easy to be set up as an agent for multiple carriers. Your sourcing provider should work exclusively as your agent, and should be an extension of your procurement team, with only your interests in mind.

Hard Dollar Savings VS. Soft Dollar Savings
Make sure your sourcing services provider is only going to bill you for actual realized hard-dollar savings. Unless you are engaging the sourcing consultant for a true business process evaluation engagement, the language of their contract should not allow for soft-dollar savings, such as the savings that can be obtained through elimination of staff or internal process improvements. The best strategic sourcing services providers will be able to obtain profitable results for their clients without attempting to fight over the soft-dollar savings of process improvements, which inevitably always become a point of contention between a provider and their customer.

Additional Costs
Make sure your contract with a sourcing provider details any and all costs that you will be responsible for the life of the engagement. Read the fine print, many consulting firms have additional fees beyond the percentage that was agreed to in the contract. These providers can turn travel reimbursement fees or technology licensing into profit centers for their engagement with you. The best providers will not have any hidden fees and will not even require the customer to be responsible for travel costs for their analysts.

Anticipated or Estimated Savings
When conducting your RFP or negotiations and contracting with a contingency based procurement services provider, make sure that they have skin in the game to ensure you realize the savings your are anticipating with the project. Many "contingency" contracts require the customer to pay a fee based off of the estimated savings that are delivered in a report towards the end of the project. This is especially true of very large consulting firms and firms that are new or unproven with the contingency model. The results that are delivered in a report often never get 100% implemented and do not account for any changes in your business or demand for the product or service. You should never sign a contingency contract that requires you to pay based on a group of analysts research and paperwork, without seeing the ACTUAL HARD DOLLAR savings implemented. Similarly, be careful if a provider wants to bill you for an average of savings. In this case a provider may track the first two months of savings and then bill you the average amount for the life of the contract. While this works for some static spend categories, it is a poor idea for a category that has season spending or a variety of line items.

Get Help With Implementation
To expand on the point above, make sure that the provider you choose is committed to the success of your engagement by ensuring that they stick with you and help with any implementation that needs to take place at the end of the engagement. In some cases, implementation is simply a matter of signing a new pricing agreement with your incumbent supplier, and only takes a few days. However, in more complicated projects, implementation can require testing, on-site visits, coordination with multiple departments, vendors and business units, and even staff training. Your Procurement Service Provider should be helping your business with each step of the implementation, not just delivering you a report and telling you to do it on your own.

Get Help with Auditing and Compliance
Great, so now you have implemented your new savings program and are on your way to an increased profit margin. But, who is watching that spend category to ensure the results are sustainable? Your contract with your sourcing provider should ensure that they are helping you with ongoing auditing and compliance for as long as you are paying for their services. Many providers start to bill on estimated or average savings after a project has been implemented, yet never ensure that the suppliers are remaining compliant with their contracts or that the customer is doing what they need to do to obtain maximum savings. Things change. New employees, new systems, new internal policies all have a chance of derailing the anticipated results of a sourcing engagement. Not only should your sourcing provider be keeping an eye on things for you, they should also constantly be in the market looking for ways to improve the project they just completed, and hopefully bring even more savings to the table.

In summary, contracting with a contingency based Strategic Sourcing Provider can have a very positive impact on your organization's bottom line without assuming a lot of the risk and costs of a traditional fee-based consulting firm. However, there are many things that you need to watch out for to make sure you get the right firm for your business. Don't be afraid to open dialog with your proposed supplier and offer creative suggestions to your contract, that include tiered incentives, or a hybrid model of fee and contingency. If your provider is unwilling to deviate from their standard contract, look elsewhere to another provider who is looking for a mutually successful engagement.

A final plug: Source One Management Services, LLC has been helping clients with their strategic sourcing and cost reduction needs since 1992. It is not a franchise model and is willing to work on contignency, fee for service, or a hybrid model to ensure the best low-risk, high reward engagements for its customers.
News lately has been suggesting that the economy is on the road to recovery but according to an article written by Charles Hugh Smith, there are some potential road blocks, or potholes as he would like to call them, along that road. The author lists these five issues as follows:

1.) Employment. Although it may appear that unemployment rates are declining there are underlying reasons for this false façade. One being that fewer people are able to collect unemployment benefits; they may have exhausted them or in some cases are not reporting at all. On the outside this leads us to believe that because the unemployment numbers are declining, that jobs are being created, this is not always the case. Unless we start seeing a larger portion of the population collecting a paycheck we are less inclined to put any weight behind recovery rumors.

2.) and 3.) Real Estate. Commercial real estate continues to lose value and this can lead to additional bank failures. So many sectors of the workforce and economy rely on the real estate industry, especially new construction. Without an increase in valuation we can continue to see a drop in various industries’ profitability. Federal agencies have been supporting the housing market in efforts to create a stronger foundation for the mortgage industry. This support is expected to begin to decline due to the lack of increasing rates and new home sales. Banks are continuing to see a rise in delinquent loans, up from 1.84% in 2008 to 2.21% in 2009.

4.) Real Estate in China. Prices in China’s real estate market continue to increase at an alarming rate. This, as well as other global declines, like we are seeing in Greece and Portugal, can lead to a value reduction in the US and foreign trade markets.

5.) US Sales and Income Taxes. Sales tax revenues are also on a continuous downward cycle, providing a poor picture of what we know as the recovery story. Retail activity has not improved and is once again a staple point in the recovery of our economy.

People are still afraid to spend money, who can blame them? If the unemployment rate is not a true figure and economists are estimating that it is most likely higher than we are seeing, then people don’t have the money to put back into the economy. As consumers we need to continue to look for savings opportunities in all aspects of our personal and professional lives. As far as this recovery story we keep hearing, we need to approach it from a holistic angle and look at the facts as they are and not as they are presented to us. It is up to you to see the light at the end of the tunnel.

Imagine paying whatever you wanted for all the materials and services you need to run your business. Sounds great, doesn’t it? Guess what, though, this fantasyland may not be as far fetched as it seems. I’ll explain why.

If you look around, many consumer businesses are already saying "pay what you want!" with remarkable success, but it’s not as surprising as it seems when you take a minute to think about it. Let’s take a look at a few examples like Eric Hagen’s startup, Recession Ride Taxi Service which quickly saw enough success to have to expand from his one van to a fleet of three. How about bands Nine Inch Nails and Radiohead who have raked in millions for their albums which were published online, free for the taking, donations welcome. Not to belabor the point, but it’s happening in a wide variety of products and services from bagels to restaurants and even electronic gaming.

So why does it work? It works because the basic principles of economics and capitalism remain intact: buyers who derive value from goods and services are willing to pay a competitive rate for those goods and services to nurture their relationship with their supplier. The supplier, in turn, has given the buyer confidence that they will deliver a reliable offering that meets or exceeds requirements and desires at a price the buyer can feel good about. The suppliers in these "pay what you want" markets are ensuring their pricing is competitive by allowing the buyer to choose what to pay. This allows suppliers to chew into enough competition to remain profitable while absorbing the loss of some of the short changers who they will inevitably avoid in the future, cutting their loss and overall risk.

Now consider how far off this is from an actual RFP. I think you’ll find the differences to be subtle at best. If during your most recent RFP one of the suppliers insisted that you name your price, I bet you wouldn’t feel like you had won the lottery. Your head would instantly spin with questions. What’s fair? How much is enough to keep the supplier profitable while meeting my requirements? How do I assess what amount might be too low, ruining my chances at securing the same arrangement long term? Is it ethical for me to pay far less than the market average and burn my bridges with this supplier for the sake of some short term savings? These and a litany of other questions would need to be considered before you named your price.

During negotiations we can pit suppliers against each other, force suppliers into loss leader situations, and get what we want but at the end of the negotiation how many bridges will have been burned? Many of the same questions above need to be considered. Concessions need to be made. At the end of the day, everyone should feel good about the arrived upon agreement and overall you will have paid what you want.

Market Intelligence (MI) is critical for any supply chain manager. MI helps businesses assess supply chain risk, evaluate supplier pricing proposals, and realize new operational efficiencies. However, many businesses rely on a limited, and in most cases outdated, set of market intelligence as the basis for decision making. Markets are constantly changing, but getting access to new information in real time can be difficult. Over the course of my next few blogs, I am going to examine what market intelligence is, how to get it, and how to use it in the decision making process.

So first, off, what is Market Intelligence? The Wikipedia definition of MI is “the information relevant to a company’s markets, gathered and analyzed specifically for the purpose of accurate and confident decision-making in determining market opportunity, market penetration strategy, and market development metrics.”

For supply chain managers, MI is information used to assess risk, ensure supply, and reduce total landed costs of products and services used to keep organizations running. Typically, supply-side MI would include:

Supplier Intelligence - At a high level, Supplier Intelligence includes the suppliers in a particular market, the financials of those suppliers, the types of goods and service levels each supplier provides, cost models, discount levels, and volume thresholds. Digging deeper, you might include information on mergers and acquisitions, relationships between distributors and manufacturers, standard industry KPI’s, and supplier plant capacities.

Product Intelligence– Product Intelligence includes the types of products and technologies available, the materials used for each product type, and the cost drivers for those materials. Additional product intel could include an assessment of the differences in products by manufacturer, as well as any upcoming technological advancements. Make vs. Buy assessments might also be included in this category.

Logistics Intelligence – Logistics Intelligence would include the common shipping methods for the products purchased, standard lead times associated with each, non-traditional shipping methods, appropriate inventory positions, inventory carrying costs, and options for vendor managed or consignment inventory.

Legal Intelligence – Legal Intelligence includes an understanding of contract clauses for a given commodity type - what clauses should be in an agreement and what terms and conditions buyers should be careful to avoid.

Trade Intelligence – Trade Intelligence includes an assessment of the political landscape, import restrictions, tariffs, regulations, weather, labor, and logistics issues of any country/region that can provide your organization with product.

Competitive Intelligence – Keeping to the supply-side, Competitive Intelligence includes a consideration of the percentage of market share your company represents for a particular commodity, as well as the market share of your competition. It should also include an assessment of your competitors purchasing habits and spend profile – are they ordering, managing inventory, shipping, the same way as you are, and if not, what are the advantages to their process over yours.

All these bits of information make up MI, all have a critical impact on the supply chain, and some are easier to get than others. In my next post I will examine the sources of MI and explore some best practices around collecting this information.
I recently read an article on msnbc.com about a man known as the “Grape Wrangler.” This man, otherwise known as David Forbes, is the founder of Accidental Wine Company in Los Angeles. In the midst of an economic downturn this so called “Wrangler” has found a small sourcing niche. Most wine distributors or vintners hardly think twice about the few bottles of wine that break and spill onto other bottles because to them it’s only a few bottles that they can easily dispose of. To the wrangler though, these few bottles are his sustenance. David Forbes has seized a great business opportunity by purchasing wine bottles that may have blemishes or misspellings on the labels or bottles. Forbes purchases the wine for a dirt cheap price and then resells it online for a third to half of the normal retail price. The only disappointment as a consumer is that you cannot request a specific brand online but you can request a specific kind. Why didn’t I think of this? Wine is wine and no matter how the economy is turning and people are always looking for a bargain. In essence, Forbes has given these wine suppliers with botched products another glimmer of hope within the supply chain. Maybe more suppliers should think about alternate options for their flawed goods. This really gives meaning to the saying “One man’s trash is another man’s treasure.”

Happy 2010 from Source One and The Strategic Sourceror. Let's hope this year marks an improvement in the U.S. and World Economy.

January also marks the 2nd birthday of the Strategic Sourceror. We are now moving into our third year of blogging and would like to thank our loyal readers. With 325+ posts over the last two years, we have been able to rapidly increase our readership base, and are looking forward to another year of positive activity.

Our 8 most popular articles from 2009:

We would like your feedback. What are we doing right? What are we doing wrong? Is there anything specific you would like to see more coverage on?

Thanks again for stopping by the Strategic Sourceror! Wish us luck for another great year.