June 2010
Right after the World Cup had held its opening ceremony and the games were about to get underway, the tournament’s popularity and hype began to escalate. One news outlet, which will remain nameless, went on to report a projection that 36 billion people would be tuning in to watch the games. That’s right: 36 BILLION. Go ahead and google “36 billion people” and the results page will have Google asking you: “Did you mean to search for: 36 million people?” According to the United States Census Bureau, the current world population is almost 6.9 billion.

Therefore, the first question that comes to mind is: Where did this figure come from? This is a question that you may commonly ask or be asked in procurement. In this specific case, no real details were provided as to how the number was determined and who performed the actual analysis. These two pieces of information are vital to all sourcing initiatives. My guess is that a decimal point was intended to be placed between the two digits. Another possibility is that the 36 billion people represented the number of people watching mutually exclusive games. For example, if an individual only watched the U.S. vs. Ghana game as well as the England vs. Germany game, they would be counted as 2 out of the 36 billion. But that would just get complicated, wouldn’t it?

If my guess happens to be right (which we will never know), decimal points have a great deal of purpose. However, there are some situations in which they do not serve a purpose at all. One example would be within a presentation which provides a spend breakdown. A PowerPoint slide can become too crowded if decimal points are utilized and spend is extended out to the exact penny. You don’t want to get to that slide and find yourself saying, “Now, in the past year, you have spent $2,497,583.08 on office supplies.” I think you are better off saying “about $2.5 million.”

When working with numbers, and this goes beyond the world of procurement, it is first always important to make sure the numbers make sense. There is always room for human error. Also, know where the data is coming from and who is actually working with the numbers. If you see a savings of 50% by transitioning to another supplier, do not celebrate too quickly and blow your vuvuzela. There is a good possibility that quality is being compromised for price or that it is really only a savings opportunity of 5.0%.
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I recently read this article about how small businesses run by locals in remote villages in Africa are the key to integrating technology and free enterprise into the hands that need it most. In remote communities of Rwanda most villagers only have access to kerosene lamps for lighting. The problem with kerosene lamps is they are very dangerous to your health and the environment. Not only are they highly flammable but they are also known to produce fumes that can cause lung cancer, therefore creating a problematic situation for any remote villager looking for light at night.

Sammer Hajee is the co-founder and CEO of Nuru Energy in London. He came up with the idea to pilot a micro business model that provides foot powered generators to rural areas in Africa who need a form of electricity the most. His idea was based around providing foot equipment to these interested entrepreneurs in hopes of providing a healthy and safe source of lighting to the community and to also educate and provide a sense of entrepreneurship within the community to help expand their remote economies.

Hajee’s Nuru Energy Company arranges micro loans to the want to be small business owner for the lamps and the electric bike pedals. Once the lamps and electric bike pedals are powered by foot pedaling they create electricity which is sent to LED lights that are sold to paying customers in the village. The entrepreneur spends approximately an hour per day pedaling to supply electricity to the LED lights. This business model produces approximately triple the daily amount of income to the business owner then a typical Rwanda earns farming per day. It takes the business owner approximately 6 months of pedaling to pay off the micro loan plus interest to Nuru, but after the principle and interest are paid the rest is all profit.

Nuru is working on expanding the micro loan business model throughout Africa and currently lights approximately 7,000 families across Africa. With the adaptation of this technology Nuru hopes to use pedal generators to make a living charging other things such as cell phone and radios.

Global capitalism is known for having its flaws and favors but I think Hajee is on the right path to decreasing extreme poverty in these rural African areas. Private capital is crucial to achieving strong and sustainable growth to reduce extreme poverty.
As Delaware seeks to join the club for banning hand held devices while driving, motorists should consider not only the legal ramifications of continuing this behavior, but personal consequences.

Consumerreports.com reported, "There are currently 600 million cars on the road and 4.6 billion cell phone subscriptions. Between 80-90 percent of accidents are caused by driver behavior like distracted driving."

This can only lead me to believe that the majority of the "distracted driving" is related to cell phone use. I am not only referring to talking, but what about texting? A recent study conducted by Princeton Survey Research Associates International reported, "One in four (27%) American adults say they have texted while driving, the same proportion as the number of driving teens (26%) who say they have texted while driving."

What is so important that you cannot wait until you have reached your destination to communicate? And if it is so urgent, why not use a safer method of driving. There is a variety of technology offered today for mobile communications and here are a few hands-free suggestions:

Earbuds, earpieces or headsets.

Bluetooth accessories that connect to your phone via a wireless connection.


There are many companies who have developed software that will inform callers that you are in the car and will also send an auto reply to incoming texts.

With the increase in cell phone production, innovation, and move towards unified communications, it is extremely likely that people will continue to conduct both personal and professional conversations on the road. It is critical that YOU focus on what you are doing behind the wheel. Keep your hands at 9 & 3, and STAY OFF THE PHONE...or at least support hands-free communications.

Please check out the below sites to understand why this is so important.

That is when considering using them in a typical sourcing process. Earlier this year, I was skimming through a market research report which detailed the current market conditions for a certain commodity. A colleague of mine had read through the same report, pinpointed a piece of information, and questioned the source. An individual who participated in developing the report replied, “It’s a rule of thumb,” as if the rule was the most trusted source ever utilized. At the time, my colleague and I both thought, “Oh, okay, it’s a rule of thumb, so this information is useful.” Fortunately, in this case, the rule of thumb was in fact correct and we uncovered actual data to support it. The moral of this ever so entertaining story is this – for the most part, rules of thumb do not serve any useful purpose in a sourcing process. To support this claim, I did some research and uncovered some rules of thumb related to purchasing. What I found was what I expected – a few statements that serve as common sense that I agree with along with assumptions that are complete nonsense.

In my opinion, a rule of thumb can be just that, my opinion. I would also classify them as either a “tested” hypothesis, an assumption drawn from experience, an estimate based on a small sample, pure common sense, or total BS. I’ve collected some rules of thumb that are listed below. Some of these I support, others I completely disagree with. I share my initial reactions to each rule and for those that I find to be so far from the truth, I offer up an alternative “rule of sourcing.” As always, we welcome any comments that agree or disagree with the following statements and my own. To browse more rules of thumb, I invite you to visit the sites I have: RulesOfThumb.org and BusinessRulesOfThumb.com.

It is important to keep in mind that rules in general can always change and we see this often in the worlds of politics and sports. The same goes for the procurement world. The economy is constantly changing and we need to be collecting real-time market intelligence in order to track these changes. In my opinion, for most of the rules I have created below, it is difficult to see these ever changing, but then again, anything is possible.

  1. Rule of Thumb: Choosing a Bidder: Throw out the highest and lowest bids. Average the rest and choose the one closest to the average.

    Response: Tell purchasing managers to follow this rule and they will laugh in your face. First off, where is the rule of thumb that says price is all that matters? Secondly, what happens if the average bid is higher than what you are currently paying?

    Rule of Sourcing: Consider all bids you receive from suppliers as potential opportunities. Before you begin your comparison, make sure you have baselined your current spend correctly. For example, all current rebates received on certain items should be accounted for as some bids may not offer any type of rebate. Also, every bid should be considered as there is always the possibility that quality will be compromised for price.
  2. Rule of Thumb: Knowing When to Quit Researching: You're done with your research when those you interview urge you to interview people you've already interviewed.

    Response: I can understand the logic behind this one, but not when it comes to sourcing a certain commodity. Many sourcing professionals tend to rely heavily on collecting historical market data at the start of a sourcing initiative. Although this market data is extremely important, it also delays and adds additional costs to the sourcing process. Companies need to be constantly collecting real-time market data from a variety of sources and not just at the start of a sourcing initiative. Often during the course of a sourcing initiative, new product developments, alternate technologies, and shifts in spend patterns present themselves. These changes need to be consistently monitored in order to adapt accordingly. A proper market assessment may present the need to revamp a sourcing strategy or change the vendors currently being targeted.

    Rule of Sourcing: Never quit researching. It should be an ongoing effort. Collaborate with organizations that manage an e-sourcing tool. These tools build a price point database as well as a supplier database. The more intelligence you have during the sourcing process, the faster the path to savings.
  3. Rule of Thumb: Negotiating an Agreement: When negotiating, use a deadline. Ninety percent of the agreement will come in the last 10 percent of the time allotted.

    Response: For the most part, this is true. As far as percentages go, I cannot attest to that.
  4. Rule of Thumb: How to Get a Negotiating Advantage: In any negotiation, the party with the most choices will have a big advantage.

    Response: Choices = Leverage. Done deal.
  5. Rule of Thumb: Asking Questions: If you ask a negative question, you will get a negative answer.

    Response: This one is just common sense. When performing reference checks on potential suppliers, you need to be careful in the wording of your questions. It is best to keep the interview as objective as possible so that you retrieve the most reliable information.

    Don’t get me wrong, I do think that rules of thumb come in handy from time to time. The main purpose of this blog is not to bash these rules but instead shed some light on how to use them appropriately if at all. I am fully aware that I reference rules of thumb in general, but anyone who finds themselves in purchasing should never rely on these convenient standards. The most important thing to keep in mind is to always have the facts to back up a statement. If not, a sourcing process could get out of hand.

I came upon this article and just couldn’t pass up the opportunity to share. If I owned a restaurant, personally I do not, I would be concerned about where the food I was serving to my patrons was coming from. I think this would be a significant concern if I were serving something such as lion burgers! Not sure if this would be a big seller anyway and for an Arizona restaurant owner it is causing quite the stir. The restaurant, Il Vinaio, thought it would be a different promotion to serve African lion meat burgers as a nod to the FIFA World Cup currently going on in South Africa. What he didn’t expect was the outcry of animal activists claiming this to be an issue.

All of the media brought on the idea to investigate where one might find African lion meat. What it boiled down to was a butcher shop in Illinois that sells exotic game meat. Something I found particularly interesting was that the owner had no qualms about selling the meat but felt he didn’t need to ask questions about how his provider came upon the animals. He just knew that the provider obtained the animals for their hides and that he purchased the meat as a byproduct. As a patron of many restaurants and a server, I find that a little disturbing. Then again, as the article sites from the owner of the butcher shop, "Do you question where chickens come from when you go to Brown's Chicken or Boston Market?". Hmmmm, maybe we should? One of the big concerns was whether or not the meat was USDA approved. Apparently the USDA does not inspect lions bred for meat , but the FDA does. Lion meat, as well as camel and tiger for example, are legal to consume….who knew! All in all, I don’t know about you but I think I may be a little more apprehensive, even squeamish about trying something exotic from now on!

This can all be tied into how your business manages its procurement. No matter what industry you are in it is important to know what you are buying, where you are buying it from, and if you are getting the best deal possible. For more information on how to manage your procurement services visit, http://www.sourceoneinc.com/.

According to Wikipedia, “a request for quotation (RFQ) is a standard business process whose purpose is to invite suppliers into a bidding process to bid on specific products or services. An RFQ typically involves more than the price per item. Information like payment terms, quality level per item or contract length is possible to be requested during the bidding process.”

An RFQ should always request the following information:
  • Price requirements (fixed price, firm price with an escalation formula, cost plus).
  • Quantities / volumes required.
  • Delivery date / completion date for the goods / services required.
  • Confirmation that the supplier can fully comply with the specification(s) / drawing(s) of the items/services.
  • Confirmation of compliance with any quality requirements included.
  • Terms and conditions of purchase / draft subcontract.
The RFQ should always be as accurate as possible. The items to be quoted should be clearly specified by including all relevant drawing, specifications, description of services etc. Always invite bidders to offer alternative solutions to the specifications tendered. The Supplier will probably have alternative solutions which will still meet the requirements at a lower cost. Always ensure the RFQ allows as much lead time as possible to ensure the negotiation process has sufficient time run its’ full course.

An RFQ will normally be issued to 3 or 4 potential suppliers as a minimum. The bidders must issue their quotation by a fixed date, which will be specified in the RFQ.

Once the quotations have been received, an evaluation process will take place. Discussions may be held on the bids (often to clarify technical capabilities or to note errors in a proposal). The bid does not have to mean the end of the bidding. Multiple rounds of negotiation may follow, normally concluding with a down-selection process and the solicitation of a best and final offer. Be sure to respond to all bidder questions promptly.

RFQ's are best suited to products and services that are as standardized as possible. My next blog will address alternative methods of soliciting bids.

In the meanwhile, take a look as some of these other related posts:
Don't Spam with an RFP
Don't let your suppliers write the RFP for you
Bypassing the RFP Process
I have been reading and hearing more and more stories about wireless policy and corporate liability regarding cell phone usage while driving. According to the Governors Highway Safety Association, 28 states have ban text messaging while driving and over nearly every state has some form of cell phone or distracted driving legislation on the books. While the law and your corporate wireless policy may restrict phone usage while driving, it’s not stopping many from continuing the practice.

Recently on the Telecom Junkies podcast produced by The Voice Report, Matt Howard of ZoomSafer discussed the danger of distracted driving, especially in regard to text and date usage. One particular point Matt made was that if an accident occurs -even if it’s an employee-owned phone- while a device is being used within the scope of work, the employer is liable. Additionally, the scope of work is very ambiguously defined and incidents can occur outside working hours, even on weekends. And the real kicker is that even with a wireless policy, the company can still be found liable if they have done nothing to enforce the policy.

Enforcement may not be easy, though. It’s very difficult to know if and when all employees may have sent text messages or sent/read emails while behind the wheel of a vehicle. Matt’s idea was to create a product called ZoomSafer which assists in enforcing policy by automatically disabling restricted features while you’re driving: suppressing inbound email and text, and responding on your behalf in order to let people know you’re driving and will respond as soon as possible. It’s a great idea to not only keep your employees’ behavior safe, but also to remove liability and hopefully keep employees from creating situations where the company may be liable in the first place.
Although the economy is not improving by leaps and bounds, an article in Business Week indicates there are some signs of recovery. Here’s a few metrics the article highlights.

PCI Index (Pulse of Commerce Index) The index measures the diesel fuel consumption data from over the road trucking. “The index climbed 3.1 percent in May from April, the largest monthly increase since February 1999.” This shows a sign of industry production as manufacturers stock their inventories.

ISM’s Non-Manufacturing Index According to the article the index has been rising fairly steadily since January while prices and new orders for nonmanufacturing were down in May from April, according to ISM. Also noted are the train shipments of waste and scrap materials that have been increasing at the fastest pace in 16 years.

Tech Pulse Index The index covers industrial production, shipments, employment, and household purchases of computers and software. May’s growth rate is at 25.8% which is down from April but above the yearly average of 25.2.

MasterCard Advisors Spending Pulse This is an indicator that reports on consumer spending in a variety of categories across the US. Although retail apparel is currently down, some categories show improvement like luxury and jewelry sales.

State and Municipal Spending It seems like most states and municipalities are in some form of economic crisis today. The article indicates the amount of unemployment taxes that are being paid by businesses to cover state and local governments is another indicator of how much money is not there. It also has an effect on hiring. Large companies may have the means to cover these costs while smaller businesses may be out of luck.

Everyday we hear from economists who let us know if things are getting better, and we watch indicators to monitor where the economy is headed. One thing the author makes clear and that I agree with is that nothing is clear cut. There are ups and downs everyday and we need to hang in there for the ride.
According to Wikipedia, spend analysis is, “the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance.”

Quoting The Aberdeen Group, savings are typically achieved by:
  • Identifying opportunities to aggregate spend and negotiate superior contracts
  • Identifying and reducing non-compliant or “maverick” spend and
  • Improving procurement operations and supplier performance.
There are 3 key activities associated with creating an effective spend analysis:
  • Gathering the data,
  • Cleansing the data,
  • Re-classifying the data.
Gathering the data is not always as easy as it sounds, data can reside in many different places. Many companies (including my last 2 employers), had data in multiple data bases. Data gathering therefore can often mean pulling detail manually by running reports in “hard copy” and inputting the information into Access or Excel. The other primary source of data can normally be found in Accounts Payable. This is most often the case in areas of indirect spend. Compiling data manually can be extremely time consuming and is often used as a reason to avoid undertaking the exercise. It is however a necessary activity and one that should ultimately yield significant savings and repay the investment in time several times over.

Once the data has been entered into a centralized database, it needs to be “cleansed.” This involves identifying duplicate entries, a common problem where multiple databases exist. Also, the database will always have items which cannot be clearly identified. In most cases, the amount of time dedicated to researching these items will normally be determined by the dollars spent on the item(s) in question.

Once the data has been cleansed, it is necessary to put it into “buckets.” This involves either creating commodity classifications within the organization, or utilizing an existing structure, such as UNSPSC. Classifications can be broken down into various “levels.” For example, in the food ingredient business, a classification might be “fruit.” This in turn might be segregated into different types of fruit, e.g. cherries, peaches, blueberries, apples etc. Another category might be “nuts and seeds.” A sub-category might be “nuts”, almonds, walnuts, pecans. Seeds would then be separated; poppy, sesame, caraway.

Monitoring compliance is the final “piece in the jigsaw.” Periodic updates must be conducted to ensure the integrity of the data. This is especially important in distribution, where supply and demand can fluctuate significantly depending on market conditions.

Utilizing this data to create effective competition is the next step; this will be addressed in a separate blog.
There is a nice article in the Spring edition of Parcel magazine that refers to a new player in the small parcel shipping market – the United States Postal Service. The article’s author, Michael Ryan, concludes that the perceived differences in service between the USPS and UPS/Fed Ex are just that, perceived.

According to the article, USPS’ own reporting indicated an on-time service performance record of 96.4% in 2009, versus 99%+ for UPS and FedEx. On the surface there still appears to be a gap. However, Michael notes that USPS limits the amount of exclusions they make when reporting and refunding late packages. Exceptions (when a late delivery is not reported as late or does not receive a refund) only include significant events, such as “war, civil disturbance, weather, and acts of God”.

UPS and FedEx on the other hand, provide a laundry list of exceptions that are excluded from their on time service statistics, including mis-sorts and mis-scanned packages! So chances are if UPS or FedEx makes a mistake that results in your package not getting there on time, they aren’t going to report that as a late package. What does account for a missed delivery time? It’s hard to say. Incident/Accidents, Temporary Local Delays, and Origin Overlooked Package (whatever that is) are other reasons why you wouldn’t get a refund for a late delivery.

It’s good to know that USPS tries to keep their reporting as honest as possible. Based on the article, which can be found here, I will surely keep USPS in mind for future sourcing engagements. After all, the position the big two have taken in response to the sourcing process (more here) after DHL’s exit from the domestic market has made shippers hungry for another option.
The down turn in the economy has brought on many effects in the workforce and in homes across the nation. So it is not surprising that this has affected the way college students make decisions regarding their career and education paths. An article from CNN indicates that students are turning to more economically robust majors that are likely to get them a more lucrative and secure job offer after graduation. More in 2009 than 2010, students were giving up the pursuit of further education and turning to the job market after college. They were concerned with the ever rising bills and finances piling up while they write papers and take exams. This is still a major factor in the expanding job market but what the article says is that students need to realize that this is a cyclical string of events that they will experience many more times.

But let’s be realistic, it just isn’t feasible to go the long haul all at one time as it was in the past. Of course many people in their 20s and 30s are still living at home to accommodate the poor economy and their finances but staying in school for eight to ten years without a full time job is an illusion for most common folk. At 28 I just finished my MBA degree online while working a full time job and a part time job. This is becoming the norm more than ever. My fellow students were all in the same types of positions. They started school years ago and found the burden of bills and family life to be more than expected and had to give up on their educations temporarily.

So now in returning to school these older students, just like the students in school today, can better understand the opportunities available in the market. Students are pursuing careers in accounting, business administration, education, and engineering. According to the article, “education, physical sciences, foreign languages, English, history and political science had the lowest job offer rates, the NACE survey showed”. Even though communications has fallen during the recession, students are still actively following it. Students in school today need to realize what is available and what will be available over the next few decades when making decisions regarding their futures. Who wants to end up in a jobless profession?
Last week I spoke with a purchasing manager about the opportunity for savings in the category of benefits and insurance. The manager was in complete agreement that his company could probably save millions and that insurance categories had never been properly sourced within his organization. He then shyly announced his plans to kick off a sourcing initiative in the category - in about two years.

Given his company’s urgent need for cost savings, I asked why not get started now? The answer was simple. The person in charge of HR who currently owns the spend is reluctant to let purchasing look at the category, but that person is set to retire in about two years.

Sadly, this approach to change management is all too common in purchasing organizations. Rather than building a business case and developing the subject matter expertise that’s needed to challenge traditional thinking and move projects forward, purchasing all too frequently accepts the boundaries they are given and quietly awaits the next opportunity.

Given the global recession, the explosion of excess capacity, and the instability of most markets, forward thinking organizations are expanding the scope of purchasing. But that change frequently comes from the top down, with Finance or another executive office providing purchasing access into previously untouched departments and categories.

A good purchasing organization should be thinking about all the low hanging fruit available in those traditionally “hands-off” departments, and using the current economic climate as a lever to get access into those areas of spend. There has never been a better time to expand the role of purchasing, and doing so could have a huge impact on the bottom line of your company.
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Saturday’s New York Times reported that “stocks tumbled Friday in one of their sharpest declines this year, leaving the Dow Jones industrial average firmly below 10,000.” They went on to confirm that “the sell-off was swift and brutal, with the broad market losing roughly 3.4 percent.” The Dow fell 324 points to close at 9,931.97. CNN.com reports, since peaking on April 26, the Dow has now lost 11.4% and sits firmly in so-called correction territory. Since hitting rally highs on April 23, the S&P 500 has lost 12.5% and the Nasdaq has lost 12.3%.”

CNN goes on to say that, “a weaker-than-expected U.S. jobs report and renewed concerns about the European debt crisis pummeled stocks Friday, at the end of another down week on Wall Street. The euro fell to a four-year low and investors piled into bonds, looking for safety.”

According to Hightower, “the real undermine of the markets was provided by statements from a Hungarian official who reportedly suggested that Hungary was going to be the next Greece. Since the market doesn’t need much in the way of fresh concern toward the Euro zone debt crisis to escalate anxiety, it would seem like the bear camp is set to start the new trading week with the edge.”

There does not seem to be any reason to expect this market to rally in the coming weeks. “Bullish” factors seem to be being discounted at this time. Hightower reported that “markets overnight seemed to discount some progress in containing the oil leak in the Gulf of Mexico and the trade also ignored news of a fairly robust UK manufacturing result for the second quarter.” According to CNN.com, “there doesn’t appear to be anything in the schedule to turn the sentiment upward and it could take several days for the fear toward Hungary to dissipate.” Expect more downward pressure in the coming days as the market tests new lows.
According to Jim Wykoff, writing on commoditytrader.com, “March soybean oil futures at the Chicago Board of Trade are presently in a strong three-week-old price down-trend on the daily bar chart. Prices have sold off sharply, scoring a fresh 2.5-month low on Tuesday, after hitting a fresh seven-month high of 41.91 cents a pound in early January.”
Factors in the market to be considered are as follows:
  • According to The Refined Oils Weekly Wire, published by Bunge for its customers, “corn planting progress came in at 93% and beans at 53%, both still in at a good pace. Corn conditions came in as favorable, 71% of corn is in “good to excellent” condition. Beans are 53% planted and should make great progress again next week. Weather is siding with the farmer as hot, “greenhouse” like conditions will promote growth.”
  • The Hightower Report reported this morning that “The House has passed the bill on a retroactive tax credit of $1:00 per gallon for biodiesel and the bill now goes to the Senate.” The Bill will be considered on June 7th. Refined Oils weekly believes that “it’s looking a bit more likely that it will pass.”
  • Hightower also points out that “there are still no signs that China officials will loosen the rules to allow import of Argentinean soybean oil as the dispute continues.”
  • The European economy continues to struggle dramatically adding pressure to our markets.

Jim Wycoff, cited above, believes that, “soybean oil traders will continue to keep one eye on the crude oil futures market. Crude is an important "outside market" that has had a strong influence over the bean oil market. Crude oil's recent sell off has helped to press soybean oil futures lower.”

So what can we make of all this? The downward pressure caused by the European financial crisis is not expected to go away any time soon. Whilst some upward pressure might result from the China / Argentina dispute, more downward pressure should be anticipated with the expected passing of the biodiesel blender’s tax credit and the anticipated bumper corn and beans crop. According to commodityonline.com, “in the long term perspectives prices are expected to move southwards on account of huge stock of imported edible oil this year as compared to last year and decision of continue to import of crude edible oil at 0% also in favor of bears in the market.” Expect more downward movement in the coming weeks.