January 2015
What is de-costing? How can it help manufacturers?

While it's not a direct component of spend management, but rather a residual insight, identifying expenses that present little to no return on investment is a growing responsibility among purchasing departments.

Acknowledging a cost when it's realized is one thing, but analyzing why that expense occurred in the first place (i.e. deducing which assets led to this marginal waste) is another. Essentially, there was a reason why money was spent on a particular piece of equipment, property or department in the past. Now, that machine is no longer providing value to the operations as a whole, so it is removed.

But first, the procurement department must understand why that asset is no longer performing. This step may involve asking the following questions:

  • Is there a more efficient, updated type of machine that can perform better than this asset?
  • Has the business model shifted in a way that renders this department responsibility obsolete?
  • Why is it that a factory is now a cost instead of a profit driver? Are larger elements at work?

Welcome to the process of de-costing

De-costing, a practice acknowledged by SKF USA Senior Vice President of Sales and Channel Bill Moore in a piece for My Purchasing Center, is a collaborative process in which purchasers, distributors, manufacturers and suppliers improve productivity by reducing "actual expenditures from one period to the next." Moore asserted that achieving greater efficiency requires that the aforementioned participants work together to collectively lower consumption.

Big data analytics could be used as a de-costing tool. Predicative maintenance is a medium associated with data analysis technology, enabling manufacturers, energy companies, health care organizations and other types of firms to consistently monitor equipment performance and activity. This in turn allows professionals to identify potential flaws within machinery or other assets and prevent full-scale breaks from occurring.

How does predicative maintenance correlate with de-costing? If specialists can use data find methods of keeping equipment operational for as long as possible, then the companies they work for won't have to spend the capital necessary to buy new machinery.

De-costing doesn't necessarily mean "spending less"

Because the applications of de-costing are so diverse, it's easy for some people to misinterpret the practice's meaning. In a post for IndustryWeek, Moore highlighted a hypothetical situation that emphasizes the advantages of de-costing perfectly.

"For example, a manufacturing company might purchase a premium bearing that costs 30 percent more than a bargain-priced bearing. But if the premium bearing lasts twice as long, the plant saves 50 percent of its bearing procurement cost alone," wrote Moore.

In other words, if it's going to cost a company more to purchase a piece of equipment of higher quality, but that particular asset will be more robust than cheaper alternative, it makes sense for the organization to procure it from a spend management perspective.

Transparency as a key component

What about the collaborative aspect of de-costing initiatives? How do suppliers and other participants of the supply chain help purchasers apply de-costing principles to their procurement practices? Moore emphasized the importance of working with these partners to make a full assessment of which assets are behaving as costs or value drivers.

Think about how a manufacturer can apply de-costing to the supplier relationship management process. The production company systematically replaces equipment as it's outdated. When it comes to purchasing new machinery, the procurement officer does everything he or she can to subvert the typical sales jargon: "The latest and greatest ..." Instead, he or she asks interrogative questions regarding certain machines. Routing out any potential problems is a key responsibility.

De-costing, in the grand scheme of things, has been around for some time, but Moore seems to have found a name for the practice.

The rise of ethically-raised animals in the food industry

Meat companies across the United States ultimately strive to provide consumers with the type of products they're willing to buy - it's not a difficult concept to grasp.

However, various reports present food organizations with disparate intelligence. While some surveys suggest people proactively search for meat taken from animals that were humanely raised, other studies indicate people couldn't care less.

Procurement departments within U.S. companies are looking at a number of factors when it comes to purchasing livestock from farms, slaughterhouses and other similar facilities. Depending on the target audiences their employers strive to accommodate, some procurement officers make look to build relationships with farmers who don't give their livestock hormones or antibiotics, for example. Identifying which businesses to align themselves with obligates meat-selling enterprises to determine what kind of products their customers are looking for.

An issue of humane treatment

The differences between ethical livestock-raising and antibiotic usage must be established. These issues are often confused to be under the same umbrella, but there are some consumers who may not care about what farmers are giving their livestock as far as hormones are concerned. However, those same consumers could care about how those animals are treated.

A survey of 2,600 consumers conducted by the American Humane Association, a fast-growing third-party audit initiative, discovered that people rank "humanely raised" labels over those that verify meat products as either organic, natural or antibiotic free. The following sentiments were also found among study participants:

  • 89 percent maintained they were "very concerned" about how farm animals were treated
  • 34 percent stated they were willing to pay 10 to 20 percent more for goods that were labeled as humanely raised
  • 74 percent asserted they would pay more for meat, dairy and eggs that came from ethically treated livestock
  • 28 percent of respondents reported they would pay as much as 20 to 30 percent more for humanely raised goods

An industry of collaboration

Although the AHA has been around for some time, it's still gaining traction among companies competing in the food industry. The association presents itself as an authority on what defines humanely raised livestock, but consumers apparently have a different perspective. When asked whether scientists, farmers or veterinarians should establish humane raising standards for farms, 99 percent of AHA's survey respondents believed such professionals should work together.

This attitude should be reflected in the procurement process as well. Consulting veterinarians, zoologists, farmers and others to determine how a company should judge whether a rancher is treating his or her animals ethically will give purchasers a clear picture of what look for in an ideal supplier.

A press release submitted by the AHA noted the number of farm animals under its American Humane Certified™ program grew nearly 1,000 percent over the past four years. That means approximately one in every eight animals on U.S. farms and ranches is accounted for by the association.

"Americans are increasingly interested in where their food comes from and how farm animals are treated," said AHA CEO and President Dr. Robin Ganzert. "The welfare of animals has always been a key issue for America's farmers and with growing demand from the public for humanely raised foods, enlightened farmers, ranchers and producers are seeking trustworthy, independent, science-based humane certification to verify good practices to retailers and the public."

The responsibility of procurement departments

Many would argue that purchasing officers are obligated to validate a farmer's claim when he or she states that his or her animals are certified by the AHA. This is where the investigation component of strategic sourcing comes into play. Receiving accreditation from an organization shows commitment, but there could be other elements at work that associations are overlooking.

I think anyone that has been employed in the supply chain and procurement fields knows that our industry seemingly could not be any hotter than it is today.  At the forefront of this change is a fundamental shift in the way that procurement and sourcing groups are viewed.  No longer are these roles looked at as cost-centers or tactical purchasing jobs, they are viewed as strategic (and critical) to the overall profitability and growth of many organizations.

But this shift is happening right at a time that experienced professionals are leaving the market.  The world is starting to feel the crunch of baby-boomers retiring (and taking their procurement subject matter expertise with them) right at a time that businesses couldn't possibly need them more.   While colleges and universities are responding rapidly and building solid supply chain, logistics, and procurement curriculum; they seemingly can’t produce enough graduates for the demands that exist.

If you don’t want someone right out of school, be prepared to pay for talent.  Even a sourcing or supply chain professional with only a few years of experience finds themselves in an incredibly job-seeker-friendly market.  Add-in some category expertise or commodity subject matter expertise and see another 30% increase in what you should expect to pay.

And what if you don’t even need someone full-time or in a permanent role?  It gets even harder. Especially if you are a smaller company or are greatly restricted with your available recruiting and HR support services.  It’s simply not easy (nor cost-effective) to tap into these resource pools.

The good thing is, this new landscape for procurement and supply chain professionals has created a relatively new availability of contingent workers who have exactly the experience you need, when and where you need it.  More and more professionals are opting for the excitement of changing roles and new challenges over the safety of 15-20 year careers at one company.  Many candidates are also becoming highly focused in specific commodities or categories; and prefer to leverage their experience in one-time events for a variety of clients.  If you can tap into qualified procurement and sourcing temp and contingent workforce, you don’t necessarily need to bring in a recurring resources for commodities/categories that only need temporary or project-based support.

Regardless of if you need full-time permanent resources or are looking to build a contingent work-force strategy for your procurement and sourcing groups, you’ll find the idea is easier said than done. It’s obviously not very easy to attract good talent.

Source One can help.  For years, we've been helping companies build and execute strategies to better manage spend, people and suppliers.   Traditionally, we've offered a variety of on-demand solutions to help sourcing and procurement groups tackle more categories and reduce further costs.  But the last few years have been a shift for us as well.  Our customers are more frequently requesting long-term resources, onsite resources, or are asking us to help recruit permanent positions for their procurement and supply chain groups.   So, we've decided to leverage the thousands of resumes we've collected, the dozens of partnerships we have in place, and the hundreds of top-professionals we've networked with and build a formal service offering to help companies in need.

Please take a moment to learn about our new services, and please contact us if we can help you develop the right staffing solution for your supply chain and procurement groups.

This Monday and Tuesday, Source One served as key presenters and participants in Q1 Production’s Medical Device Strategic Sourcing Conference. The first-ever of its kind, the conference was a huge success – providing a forum for industry leaders and experts to collaborate and share best practices in the strategic implementation of cost modeling, supplier transparency, and regulatory compliance.

Serving as the Chairperson for Day One, Source One’s Vice President of Professional Services, Joe Payne, provided opening remarks and introduced each of the day’s discussion topics. Of particular note was the first topic: “Defining the Strategic Side of Sourcing: What Does it Really Mean?” – a core function and area of passion for the Source One team.

Also on Day One, Joe Payne served as the discussion moderator while industry expert panelists reviewed the value of supplier relationship management (SRM), another critical focus area for Source One. Supplier Relationship Management (SRM) programs have recently presented overwhelming evidence that firms who invest in these outlets achieve a significant ROI. In fact, companies considered to be leaders in SRM best practices see an average of 20x return on investment versus those who overlook the importance of this strategy.  Adopting the best SRM practices possible for your organization can yield a significant return. As medical device organizations establish partnerships with device component vendors, building relationships is key in addressing quality, cost, and risk concerns. This discussion was effective in providing ideas to help firms achieve maximum value from their existing supplier relationships that benefit core business activity.

On Day Two, Source One’s Vice President of Operations, William Dorn, facilitated conversation surrounding internal metrics to deliver optimal strategic sourcing performance in the medical device space. This is an area in all industries that has been gaining a ton of focus. Source One’s Vice President of Professional Services, Joe Payne, participated in this panel as well among two respected industry colleagues. The discussion revealed that although supplier pricing and external metrics are certainly a determinant of strategic sourcing success, there are a multitude of internal metrics that can be shaped to deliver optimal performance in the medical device space.

Throughout the conference, Dorn manned Source One’s exhibition booth as attendees stopped by to share their best practices and learn more about the benefits of hiring a procurement services provider (PSP). Dorn noted, “This was a fantastic opportunity to collaborate with respected industry leaders in this rapidly expanding market. Everyone benefited from a greater understanding of the various levels of sophistication in procurement operations – from the relatively small and simple to the very large and complex.  There is no one-size-fits-all solution; every organization must partner with suppliers and service providers who meet their particular needs and help them achieve sustainable growth – especially in this life-saving industry.”

If you are interested in discussing any of these topics with Source One to improve your medical device sourcing process, look no further. If you’d like to get in contact with our team, please reach out to myself, Heather Grossmuller, at hgrossmuller@sourceoneinc.com and we’d be happy to schedule a meeting. To learn more about Source One’s medical device sourcing capabilities, visit our webpage today.

Photo courtesy of: www.bbb.org
How national concerns disrupt arms purchasing

Arms procurement is a tricky business, both from a seller's side and a buyer's standpoint.

From the former's perspective, military equipment manufacturers must be cognizant of the implications of providing combat assets to certain organizations. From the latter's viewpoint, maintaining a reputation of ethicality is a priority, as any signs of human rights abuse will make it difficult for such an entity to purchase materials. 

In regard to purchasing concerns, a different approach to procurement must take place. In addition to ensuring an organization is providing its personnel with quality arms, it must walk a fine line between transparency and confidentiality when building supplier relationships. 

Germany halts weapons sales to Saudi Arabia 

According to the Agence France-Presse, Germany has decided to halt arms distribution to Saudi Arabia, citing the region as unstable. On Jan. 21, the German national security council, which includes Chancellor Angela Merke​l and Vice Chancellor Sigmar Gabriel as well as seven other ministers, made the official judgment. 

With this move comes the loss of what was once a strong seller-supplier accord. Saudi Arabia purchased approximately $400 million worth of arms from Germany in 2013. However, from the perspective of many German citizens, maintaining this connection isn't worth it - 78 percent of Germans assert their country should cease Saudi arms sales due to human rights violations. 

Contention in Saudi Arabia 

Why has Germany elected to alienate Saudi Arabia? Human Rights Watch noted Saudi Arabia increased arrests and trials of "peaceful dissidents" in 2012, and reacted with measured force against citizens who conducted protests or other demonstrations. 

What's most disconcerting for German citizens, as well as many people throughout the world, is Saudi Arabia's neglect for women's rights. HRW cited one instance in which a car chase by religious police left the driver's wife and daughter in critical condition. After the injured parties were transported to a hospital in Baha, the doctors could not amputate the wife's hand because there was no male legal guardian to sanction the procedure. 

In addition, the human rights association maintained that Saudi detainees often suffer routine psychological and physical mistreatment in corrections facilities. 

Procurement can't fix a bad reputation 

Procurement has its limitations, and as general human rights awareness has quickly become the norm among global citizens from all corners of the world, it makes sense that Germany and other nations will cease arms shipments to nations that disregard this sentiment. This makes the issue a widespread administrative and institutional problem. 

US defense spending: Increasing or retracting?

Spend management is a critical component of the United States government's military considerations. Equipping personnel with quality equipment is a necessity, but pressure from legislators can suppress expenditures. 

That is why officials from the Pentagon often make thorough assessments of not only how much the Department of Defense, its subsidiaries and other agencies spend on materials and operations, but also how well personnel are performing as a result of those expenses. Purchasing requires comprehensive analysis of all angles.

US military may receive leeway 

Bloomberg's Roxana Tiron acknowledged speculations from House Armed Services Committee Chairman and Texas House Rep. Mac Thornberry, who maintained that the U.S. military will likely be relieved of past spending caps in light of concerns about everything from cyberterrorism to nuclear weapons threats. 

"On both sides of the aisle, there's widespread agreement that the resources going to the Pentagon are not enough to meet that wide array of threats," said Thornberry, as quoted by Tiron. "If you got Republicans and Democrats in the House and Senate who want to do that, I think we will. I trust that the president, given all that the country is facing, will want to do that too."

Some contention regarding cap leniency comes from Democrats in Congress who are concerned that more defense spending may mean less funding for domestic programs. 

Looking toward greater savings 

While they may not be aware exactly how financial resources are being allocated, many U.S. citizens are calling for reduced defense spending in general. From the Pentagon's perspective, allaying the concerns of U.S. residents and legislators alike involves finding where capital can be more appropriately allocated. This measure can be undertaken by finding out where savings can be made - perhaps there are certain sub-departments that do not require as much funding as others. 

Defense Industry Daily acknowledged estimations made by the Pentagon's Defense Business Bureau, an advisory entity that is dedicated toward providing expertise to senior leaders from a private-sector perspective. The bureau discovered $25 billion annual savings within DoD practices, most of them in procurement, logistics, property management, human resources and health care.

While the military does not operate the same way as private firms do (the latter of which make top-to-bottom changes designed to improve efficiencies), the Defense Business Bureau's analysts did note that renegotiating contracts, cutting personnel, modernizing IT assets and re-engineering "business" processes can result in the savings highlighted above. 

Is the future shining on copper procurement?

Businesses across multiple industries are making assessments as to whether procuring copper over the next year and beyond will be rife with difficulties. 

When it comes to purchasing any sort of mineral, a number of concerns are regarded by sourcing specialists. For one thing, enterprises want to ensure their copper suppliers are executing fair labor practices and extracting the mineral efficiently. In addition, corporate procurement officers are concerned about how copper will be physically transported from mines to refinement centers, manufacturing centers and finally the consumer market. 

Industries impacted by the copper economy 

Democratic Republic of the Congo-based firm Somika, which specializes in copper and cobalt mining and processing, listed several sector-specific use cases of copper: 

  • The communications industry has used copper to develop both long- and short-range cables as well as printed circuit boards for electronic equipment. However, fiber-optic offers a faster method of data delivery, which is gradually rendering copper obsolete. 
  • The energy economy favors copper for its ability to conduct electricity and heat incredibly well. Furthermore, the mineral can be remanufactured to create alloys such as bronze and brass, which are more corrosion-resistant than pure copper. 
  • Plumbing and heating mechanism developers use copper to create portable water and heating systems, and regard the metal as the preferred material of professionals working in this space.
  • The automotive industry uses copper to make heat transfer devices such as radiators, bronze sleeve bearings and oil coolers. 

Somika's input makes it obvious just how important copper is to the global economy. It's no exaggeration when one says that billions of dollars are at stake. While this scenario isn't likely to occur, if copper production were to cease completely, the automotive, communications and energy sectors would have to find new materials to replace the precious commodity or reinvent the wheel, so to speak. 

Prices continuing to fall 

According to PricewaterhouseCoopers, the price of copper reached an all-time high of $4.60 per pound in April 2011, which indicates a high demand for the mineral. Since the beginning of 2013, copper has traded between approximately $3.00 and $3.80 per pound. 

From a copper mining perspective, forecasts don't look too attractive. PwC's survey of copper producers found that 60 percent of respondents believe the price of the metal will decrease throughout the next year. Diego Hernandez, CEO of Chilean copper mining enterprise Antofagasta plc, maintained that new extraction projects are expected to boost supply throughout the next year, causing oversupplies in 2015. 

Procurement officers are likely to favor this environment, especially those working at construction materials manufacturers and electronics producers. Overall, the consumer economy may benefit as a result because more affordable raw materials often translates to item price reductions. 

This environment doesn't mean copper miners will suffer over the next year. A large majority (85 percent) of PwC study participants asserted their operation expenses are anticipated to decrease within the next 12 months. None of the respondents acknowledged estimates that processing expenses will rise throughout the same timeframe. 

Some unable to support operations

Despite PwC's discoveries, some mining companies have been forced to downsize as a result of copper price reduction. Manufacturing.net noted Revett Mining, which is headquartered in Spokane Valley, Washington, recently announced that it will suspend activity at Troy Mine, which extracts copper and silver in Northwestern Montana. 

Seventy out of the 80 employees currently employed at the facility will be laid off. Revett CEO John Shanahan maintained that the center will not shut down completely, and will likely reopen in the event copper prices rebound. 

​However, Revett's situation isn't indicative of the industry as a whole. Montana Resources, another mining company with a facility located in Butte, Montana, employs 350 workers and will remain operational for the foreseeable future. 

Should organizations hire a supply chain EHS leader?

Now more than ever, an organization's reputation is defined by how it executes sustainable practices. Supply chains typically receive scrutiny in this regard, attracting attention from consumers and potential business partners alike who want to associate themselves with socially and environmentally responsible brands. 

While conducting assessments of prospective suppliers, procurement professionals often scrutinize how well or poorly companies indoctrinate sustainable standards throughout their operations. Those that skimp on safety protocols or blatantly neglect their impact on surrounding ecosystems are written off as a risk and not considered. Even if a supplier is contracted, the purchasing department continues to analyze its practices throughout the duration of their accord. 

The birth of the EHS manager?

Given this approach to supplier relationship management, it's a wonder whether or not enterprises are creating environmental, health and safety positions within procurement departments. According to the National Association for Environmental Management, an EHS manager oversees internal and external operations to ensure all suppliers and staff are abiding by national EHS regulations in addition to supporting progressive environmental policies and worker safety programs. 

Surprising to some, EHS managers often started out as engineers or scientists. This provides them with an advantage of sorts, as it allows them to scrutinize manufacturing, chemical sourcing and processing operations from a technical perspective. Combine this unique expertise with knowledge of industry best practices and government policies and you have yourself a valued contributor to a supply chain management team. 

Extending to every facet of the supply chain 

Manufacturing Business and Technology contributor Paul Leavoy acknowledged the time when EHS compliance requirements only applied to organizations procuring goods from overseas enterprises - companies were not held accountable for the actions of their suppliers. While current EHS obligations remain quite confusing in this respect (standards may change depending on which industry you're referring to) public perceptions have motivated organizations to rigorously scrutinize every entity in its supply chain for environmental and workplace negligence. 

Never underestimate the convictions of a knowledgeable consumers. Social media has connected people from all over the world in a way businesses didn't anticipate in the past. Facebook, LinkedIn and a plethora of other platforms have created a global society that values the livelihoods of those living in different parts of the world. If abominable labor conditions, rampant pollution and negligent waste is persisting as a result of a company's supplier practices, the procuring enterprise will receive just as much criticism as its partner. This goes beyond disparaging Facebook comments and ventures into the realm of informal boycotts. 

Improving EHS adherence 

Businesses looking to maintain profitable, ethical supplier relationships must take a number of steps to ensure every entity within their supply chains possess the same values as their own. Leavoy recommended that creating an EHS position or sub-team within a larger procurement department is a step in the right direction. If a group of people can dedicate 100 percent of their time to maintaining EHS regulatory compliance and supplier sustainability assessment, thorough partner profiles can be developed and referenced as needed.

From there, enterprises must consider constructing a comprehensive supplier EHS review process comprised of the following steps in mind:

  1. Interview nonprofits and private enterprises about a prospective supplier's operations. Does its leaders proactively find ways to integrate sustainability into their operations?
  2. Visit facilities and interview laborers as if you're a government figure conducting an audit. 
  3. Ask the prospect whether its managers would be willing to submit regular EHS reports if an agreement is established. 

These measures are simple to take. In the long run, companies will be able to develop a portfolio of suppliers they can hold accountable. Consistent reporting will further solidify a brand's stronghold over its EHS efforts. 

MRP Systems: Conserving Human Resources

When a company underestimates its human resources, it can waste more than it saves in terms of money, time, and intellectual property. Companies considering investing in technology and its material requirements planning (MRP) system initially think that there is no need to invest in additional modules because enough employees exist to handle the tasks.

A Forbes article analyzed the ERP system market back in 2012. “SAP had just over $6B in total ERP software revenue in 2012, leading the worldwide market with 24.6% market share.  Oracle (ORCL NaN%) had $3.12B. From Burleson Consulting, “Oracle Applications is one of the world’s most complex ERP tools with over 130 specific business functional areas”. SAP’s Wiki informs SAP has more than 270 different modules.

These two companies are not deceiving hundreds of businesses with non-profitable modules. There is a reason they have such a variety and expansive service to offer companies. What they have to offer saves time and money and human resources.

Scenario A: A company decides to save money by not investing in a module that allows SAP to produce reports that show all orders with a supplier—including the exception messages for meeting that company’s production schedule. This module also has the ability to send the report directly to desired suppliers because it is connected with the company’s Outlook or messaging system.   Without this tool, the company’s employees have to take the time and run the reports. Those employees have to wait for the report to finish, export it to Excel, and then send emails to the suppliers. Depending on the amount of open orders and the amount of suppliers, this could take an employee ten percent of their weekly time allocation. With that ten percent of the employee’s time lost, there have no time to think strategically and consider ways to save the company money. The employees do not have time to develop new intellectual property for the company. The possibilities are endless with what a human could do with their time. The possibilities are limited when they are tasked with assignments a computer could do.

Scenario B: A company decides to save money by not investing in a module of Oracle that analyzes order patterns and inventory levels of a manufacturing company. This module could have provided insight to reaching the economic order quantity desired. The module could be set to a forecasting model that fits the companies industry and size. Instead the company now wastes money by purchasing more than what it needs of some products and has shortages of other products.

Why do so many companies neglect to take the time with an MRP expert to determine which modules fit best for their requirements, their staff capabilities, and ultimately their strategic goals?  We know that a dollar now is better than a dollar tomorrow. However, the dollar now can be better spent to save more money in the long run.

Imagine the frustration of dealing with a 40-hour maintenance shutdown with no access to sensitive data from a customer’s perspective. Or even more unpleasant, dealing with the backlash as the responsible party. This recently happened to Verizon as they underwent what was intended to be a “seamless upgrade functionality” for its cloud service. The irony being that the upgrade was intended to allow future upgrades to occur with no service interruption as Verizon pushes to become a leading enterprise cloud service provider. Credibility for cloud service providers is contingent on reliability. And while Verizon notified customers in advance of the shutdown, 40 hours of downtime for most is simply not acceptable. When customers see other telecommunication giants offering the same enterprise class cloud structure without all the headaches, Verizon immediately begins to lose credibility as a strong contender. Upgrades of this magnitude are always particularly challenging. And while every upgrade has some planned impact, what can be done to tackle business disruptions such as this one? Below is a list of strategies to assess and manage risks particularly related to telecom and IT:

Stay informed to the latest technological advancements and security measures. Monitoring advancements in security measures will serve as guide for key risk that should be in your organization’s radar. Observing technological advancements will help lessen the effects of any future technology disruptions and aid in prevention of your organizations falling “behind the curve”. Both serve as examples of how you should be altering your business model to support new functions.

Understand the risk of your main network technology type. Numerous business risks are due to a lack of end-to-end understanding of services, platforms and processes. It is imperative to understand both the current and historic network configuration. You cannot accurately mitigate risk on something you do not understand. By understanding the technology type you can then recognize the unique risk and issues associated with it.

Implementation of comprehensive IT security measures. Understanding emerging security threats and being able to maintain effective policies will help ensure that security measures remain proficient. While telecommunications has its own unique security standards and frameworks, it can prove beneficial to use different industry security models to offer a richer, broader approach. You can also collaborate with suppliers and partners to tackle privacy and security issues in new service areas.

Impose constant communication. Verizon poorly chose to notify consumers of service restoration through a press conference release leaving many consumers unaware and frustrated. When dealing with service disruption, providing consistent and constant updates to the consumer will ease tension while improving customer communications and increasing service trust. It is also important to enforce constant communication within your organization. By maximizing transparency with both the consumer and company disruptions.

Diversify your infrastructure.  By locking your organization into a single architecture, you create an inflexible and potentially more costly environment. Performing redundant backup of your data can help assure that it is stored securely and can be accessed quickly in case of any disruption to your core infrastructure. This can be achieved by looking into hosting with an alternative supplier or as simple as disk based backups.  In the event of an outage, the number of customers left with no access to vital information is substantially reduced due to the building of diversity into the infrastructure.

Perform strategic risk review. Conventional risk management techniques will only highlight service level risk. Depth analysis in key risk areas ensures that mitigation of the risks can be fulfilled. They should be assessed against established methodologies by staff with the necessary expertise. After completing a strategic risk review, impose new metrics to track and control the likely introduction of risk. While this process may seem very time consuming and costly, the return on investment is significant when compared to the mitigation of losses.  In addition, doing so will translate into true granularity to improve both organization performance and client experience.

Cited: http://www.ciosummits.com/media/pdf/solution_spotlight/wedo_future-telecoms-risk-management.pdf


How oil procurement reduces consumer prices

There's a reason why gasoline is the cheapest it's been in six years. Bloomberg noted automobile owners in the United States paid an average of $2.20 a gallon for regular petrol throughout the first week of 2015. 

Reducing the length of the supply chain 

A large reason why this particular resource is more affordable now than it was in 2008 is because of where oil companies are purchasing it from. The past two years witnessed an uptick in domestic and Canadian fossil fuel extraction and processing, allowing companies to redirect procurement away from overseas countries. 

Essentially, there's more risk involved with transporting oil from countries as far away as Venezuela and Saudi Arabia, which were among the top five countries the U.S. imported petrol products from in 2013. Exactly 42 percent of total net imports (a figure developed by identifying total U.S. petrol exports) came from Canada in that same year, according to the U.S. Energy Information Administration. 

Thanks to robust rail assets, between the U.S. and Canada, it makes more fiscal sense for spend management officers to advise energy companies to source from domestic resources. Not to mention, the potential dangers associated with overseas shipping are causing such professionals to refrain from recommending their employers do otherwise. 

U.S. crude production rising 

Bloomberg acknowledged that U.S. oil out put rose to 9.13 million barrels a day at the tail end of 2014 - the highest level since 1983. Over the past five years, U.S. production has grown 66 percent thanks to the horizontal drilling and hydraulic fracturing techniques that have been so popular among industry participants as of late. 

Forbes contributor Thomas Landstreet regarded an announcement from the U.S. Bureau of Energy Management stating the U.S. government will allow seismic analysis of the outer continental shelf of the south Atlantic coast. Given environmental concerns associated with the fossil fuel industry, this development marks a significant shift in the U.S. economic policy. This will also further reduce the nation's dependence on foreign oil - the U.S. is already projected to surpass Saudi Arabia's oil output rate as a result of fracking. 

Effects on green energy 

This burgeoning sector will no doubt have an impact on the U.S. alternative resource economy. Research and development in solar, wind and other such technologies may decrease as oil becomes cheaper. However, booth Bloomberg and Forbes noted that price reduction is expected to slow to a standstill over the next year or so. 

Did 2014 signal the end of physical piracy?

Compared to the number of attacks that occurred between 2009 and 2013, 2014 was a relatively tempered year as far as oceanic piracy is concerned.

Statista noted 445 instances of ocean liners being infiltrated by pirates in 2010. Last year, that number decreased to 72 - a signal that the contentious environment that has stirred apprehension among procurement management officers and other professionals involved with the supply chain has largely decreased.

The question is: Are distributors out of the water? In order to determine whether ships can freely traverse the globe's waters without taking precautions to protect themselves against pirate attacks, it's important to assess whether ocean-bound plunderers are simply employing new tactics or are hitting other logistics assets. 

Statistics don't paint the whole picture 

Somalia has typically received the most attention in regard to pirate attacks, and a significant reduction in activity from pirates originating from that nation has contributed to an overall reduction in global piracy. The Seychelles News Agency noted that consistent victories over al-Qaida-linked Somali terror group al-Shabaab by the African Union Mission has weakened the organization's hold over territories that have served as bases for Somali pirates. 

Depending on who you speak with, a number of factors contributed to the rise of Somali pirates. The Telegraph reported that a lackluster fishing economy and the country's political collapse in 1992 spawned a nation berated by consistent clan wars. In the midst of a monetary environment that offers meager standards of living for those who choose to earn money through legitimate means, piracy presents itself as an attractive trade to up-and-coming denizens who want to rise out of the poverty they have been accustomed to.

"Young people get attracted into this business because there is very high unemployment here, almost 100 percent, with no factories or industry," said former Puntland Interior Minister Mohamed Kalombi to the source. "But now they see the chance to make millions of dollars through crime. With their money, the pirates are buying weapons and even bribing the justice institutions so that they will not be caught."

While the election and acceptance of political moderate Hassan Sheikh Mohamud in late 2012 has brought a level of stability to the country, what precautions did enterprises take to deter pirates from disrupting their supply chains? 

The rise of mercenary forces? 

Reuters noted the Queen Mary 2, a British cruise liner that carries 2,500 passengers and 1,300 crew members, apparently hires armed private contractors to escort them through waters that are at​ risk of encountering pirates. This precaution has become routine for Cunard, a British ocean liner company. Although exact security measures were not disclosed to the news source, the company did confirm that mercenaries aboard other vessels regularly carry assault rifles similar to that of M-16s. 

Despite the prevalence of private contractors, military networks are often leveraged for protection. Reuters referenced the establishment of the UK Maritime Trade Organisation, which allows British container ships, tankers, cruise liners and other vessels to register with UKMTO when they're traversing contentious waters. 

Not out of the water yet 

While these and other security measures have generally discouraged Somali pirates from conducting hijacks, Southeast Asia has not been exempt from such attacks. Maritime Executive noted that initiatives taken against small tankers throughout the region rose by almost 50 percent between 2013 and 2014. 

West African nations are also experiencing instances of piracy. The source noted that oil tankers have become the primary targets of Nigerian pirates. It appears, for the most part, these perpetrators are looking to steal the resource as opposed to holding vessels as ransom.

Regardless of these measures, consulting experts who keep a close on the wax and wane of piracy is advisable. 

Source One Vice Presidents Joe Payne and William Dorn will be featured attendees at the 2015 Medical Device Strategic Sourcing Conference, taking place January 26-27 in Atlanta, GA. Joe Payne will serve as the Chairperson for Day 1, providing the opening remarks and introducing the distinguished speakers.  On Day 2, Payne will participate in a panel discussion facilitated by his fellow Source One VP, Bill Dorn. Throughout both days, Payne and Dorn will host an exhibit for Source One’s capabilities as a partner for medical device manufacturers.

To prepare for the conference, we’ve been spending some time wrapped up in developments of the industry. Both Payne and Dorn paid particular attention to a recent Tech Crunch article that states, “Medical Devices are cool again”—and they couldn’t agree more.

With the development of 3D printed human implant parts in China at Peking University, many people have a revived interest in medical devices. The overall promise of the industry is overwhelming. Unlike other healthcare segments, the U.S. medical device field consists of 6,500+ companies with more than 80 percent small businesses with fewer than 50 employees. A main theme of the Medical Device Strategic Sourcing Conference becomes intertwined with our findings of this unique and evolving market: the need for reliable, compliant, and cost-efficient supplier partners is of great importance. This, however, is not the only determinant of value.

On Day One, Joe Payne will serve as the discussion moderator while industry expert panelists review the value of supplier relationship management. As medical device organizations establish partnerships with device component vendors, building relationships is key in addressing quality, cost and risk concerns. As this discussion unfolds, SRM will be established as a way to help firms get maximum value from existing supplier relationships, beyond the Strategic Sourcing/Procurement activity and contract signature.

During the panel discussion on Day Two, Source One’s Vice President of Operations, William Dorn will facilitate conversation surrounding internal metrics to deliver optimal strategic sourcing performance in the medical device space. Source One’s Vice President of Professional Services, Joe Payne, will participate in this panel alongside two esteemed industry colleagues. Based on Strategic Sourcing’s tendency to view cost reduction efforts through an external lens (solely dependent on supplier pricing), the panel will encourage attendees to look internally to promote lean business. This can be accomplished through establishing performance metrics to determine potential areas of improvement and drive efficiency wherever possible. With this discussion, Medical Device and Strategic Sourcing professionals can better develop plans to:
  •           Build a strategic sourcing metrics strategy
  •           Establish Key performance indicators (KPIs) in evaluating sourcing activities
  •           Define metrics to ensure sourcing’s comprehension of the plan
Whether it pertains to 3D printing technology, new product development, or prototyping labs, there are a ton of advantages the medical devices industry is seeing from emergence as a “cool” business sector. The Medical Device Strategic Sourcing Conference is designed to stay on top of these exciting changes, and discuss ways that strategic sourcing can best be implemented in these circumstances. Source One’s Joe Payne and William Dorn look forward to networking with medical device manufacturing firms on the cutting edge of developing a competitive sourcing approach. We have studied the challenges medical device and diagnostic equipment manufacturers are encountering, and through this conference we wish to add to the long list of ways Source One helps navigate these areas of difficulty.

Before, during, or after the conference, we are happy to set up time to learn more about your sourcing obstacles and show you how to overcome them. If you’d like to get in contact with our team, please reach out to myself, Heather Grossmuller, at hgrossmuller@sourceoneinc.com and we’d be happy to schedule a meeting. To learn more about Source One’s medical device sourcing capabilities, visit our webpage today.

Photo courtesy of: www.infotehna.com
Will the manufacturing skills gap decrease in 2015?

In regard to general complaints regarding the lackluster nature of the United States manufacturing employment rate, it's clear that spend management departments have the resources available to hire new workers. 

The thing is, these budgets are allocated for employees possessing high-demand skill sets. Domestic production companies are introducing the Internet of Things, robotics and big data into their primary operations, making these three technologies the central cog in a wheel that keeps spinning. 

Frantically searching 

The Wall Street Journal noted statistics developed by Accenture PLC and The Manufacturing Institute, which found more than three-fourths of U.S. manufacturers reported having difficulty finding capable personnel, although the news source maintained that a number of economists are skeptical of this figure. Why the doubt? There are still millions of people who are unemployed, so it's a wonder as to why production companies are having trouble perusing a massive labor pool.

A number of factors could be causing these real or perceived labor issues. It could be that some manufacturers simply aren't encountering qualified workers or that people aren't looking for jobs at production plants (although this latter speculation is unlikely). 

However, Manpower chairman Jeffrey Joerres maintained that employers are more cautious about hiring new talent now than they were before the recession, which is indicative that the economy hasn't fully recovered. Human resources departments often look for those "perfect hires" that represent low risk to their businesses' profitability. 

"How many times did you think it was safe to go back in the water, and all of a sudden Europe took a dive, all of a sudden the financial markets a dive, all of a sudden China's not growing again," Joerres told the news source. 

The outlook for 2015

The sentiment among analysts such as Manufacturing.net's Bridget Bergin is that 2015 will be pretty much the same as last year, if not a little worse. In order to improve this condition, she emphasized the need to develop vocational curriculums that focus on building factory skills. These programs won't be easy by any means, as the high-tech equipment used by most production companies requires basic knowledge of design and programming. 

With this education in mind, it's important to note that people aren't going to spend the energy and money for these courses without being duly compensated. This issue goes beyond paying workers at higher wages or salaries, and concerns providing them with comprehensive insurance packages that cover health, dental and possibly life if the job is dangerous. 

How will customization affect industrial procurement?

Whether or not customization will have a massive impact on a manufacturer's purchasing management practices depends on the enterprise's customers and how its marketing team advertises its products and services.

A new era of procurement? 

For instance, a production company that takes personalization to the next level by allowing its website patrons to build upon bare-bones items and tailor specifications and attributes to their individual preferences will likely require a more versatile breed of procurement - one that aggregates data from point-of-sale systems, marketing automation software and industry studies. On the other hand, if a manufacturer simply advertises certain goods that are already being mass-produced to specific customers, then purchasing may not see as much of an impact. 

What it comes down to is aligning an organization with suppliers that can provide a diverse range of materials in an expedited manner. Of course, a supplier can only deliver goods so fast, and reducing lag time may involve establishing relationships with companies located close to production operations as well as tempering customer expectations. 

Personalization continues to gain traction 

Why would manufacturers offer to customize items for their target audiences in the first place? Over the past few years, marketing departments have been leveraging personalization as a way to build stronger connections with their customers. Companies have a lot of consumer data at their disposal, and it doesn't just pertain to certain market segments. Information regarding specific individuals has enabled businesses to deliver ads and recommend products that are applicable to people's disparate interests. 

Personalization is more than a buzzword. Forrester Research released a number of statistics after interviewing 27 email marketers and conducting a survey of an additional 89 such participants:

  • When email subject lines are written based on recipients' interests, they are 23 percent more likely to open the messages.
  • Lead conversion rates grow 10 percent when personalized emails are used. 
  • Forty-five percent of respondents have been using personalized email campaigns for more than three years, while an additional 38 percent have been doing so between one and three years. 
  • Less than half (40 percent) of consumers purchase more goods from merchants who personalize shopping experiences across different channels. 

How customization impacts manufacturing 

While customization and personalization are two different practices, they're closely related, as individuals presented with services tailored to them will want the same from products. Kevin O'Marah, chief content officer of SCM World, wrote a piece for IndustryWeek describing how this behavior will affect manufacturing

To start off, O'Marah asserted that the high-throughput, low-variability features of mass production will transform to become more agile, capable of responding to frequent, diverse customer demands without disrupting operations. While factory administration will need to evolve to fit this model, the facilities themselves will obviously have to undergo physical renovations. 

However, factories are already procuring technology that will allow them to support customization efforts. Advanced robotics, 3-D printing and sophisticated digital simulation will all contribute to establishing expedited production runs and unit-level customization. O'Marah noted one instance in which automotive companies employed robots that are able to conduct multiple  tasks and work alongside human laborers. The result is a process that creates unique products at almost the same pace as high-speed repetitive production. 

There's something to be said about the capabilities of 3-D printing - also known as additive manufacturing. Invisalign, a company that specializes in making exclusive dental molds for individuals who want to straighten their teeth, has an output of nearly 40 million unique items each year. Over the past four years, the cost of producing each unit has decreased 48 percent and production times have been cut in half thanks to 3-D printing.

In regard to this development, it's clear that procurement officers will also have to focus on purchasing technology that will support agile manufacturing processes. 

Procuring graphite in the 21st century

Not too long ago, we wrote a piece about graphene - an incredibly thin compound made up of carbon atoms that has been regarded as the material that will bring computing, medicine and other scientific disciplines to the next level. 

While the substance offers advantages in the way of mass production and affordability, use cases remain less definitive. One thing is for sure: The way in which graphene is used by this century's manufacturers and scientists will send a rift through the graphite industry. 

Procurement concerns 

The general consensus among some purchasing management experts is that nearshoring or reshoring production can reduce supply chain risk and expenses. However, in order for a manufacturing boom to occur in North America, the United States and Canada need to allow miners and mineral fineries to establish operations more easily. 

As far as the graphite market is concerned, the continent doesn't have much of a share of the production economy. According to Northern Graphite, China produces 70 to 80 percent of the globe's graphite supply - 70 percent of which is fine or amorphous while the remaining 30 percent is flake. During the offshore manufacturing trend that swept North American in the '90s, Chinese production drastically reduced the price of the material.

However, the Chinese graphite economy isn't faring as well as it did 20 years ago. The source maintained that Chinese production capacity is being consolidated - in 2012, China invested $150 million to create Southern Graphite Ltd., a state-owned company that is scaling down from 230 graphite mines to 20, which will reduce the nation's output by 90,000 terapascals (TPa). 

In addition, Chinese operations have been criticized as being antiquated, and are characterized as possessing poor labor and environmental standards. Serious modernization, policy revisions and a 20 percent export duty on graphite will certainly raise the cost of the material at a time when demand is increasing steadily. 

Automotive interests 

One of the reasons why demand for graphite is rising is that those participating in the automotive industry have expressed considerable interest in flake graphite. IndustryWeek acknowledged collaborative efforts between Ford Motor and DowAska, a joint venture between The Dow Chemical Co. and Aska Akrilik Kimya Sanayii A.S., which focuses on the graphite industry. Through the accord, the two enterprises intend to conduct research into high-volume manufacturing techniques for automotive-grade graphite. 

Carbon fiber has grown more popular among vehicle manufacturers for the substance's light weight, which would make cars and trucks more fuel-efficient. Ford and DowAska are combining efforts to identify and implement a system that subverts the high cost and scarcity of carbon fiber. 

"This collaboration helps us accelerate our efforts to create lighter automotive-grade composite materials that benefit customers by enabling improved fuel economy without sacrificing strength," said Ford Global Manager of Materials and Manufacturing Research Jim deVries, as quoted by the source. 

Patrick Blanchard, supervisor of Ford's Composites Group, maintained that the applications of carbon fiber are quite diverse, and could be implemented in more components than simply the body. 

"Our goal is to develop a material that can greatly reduce vehicle weight in support of improved fuel economy for our customers," said Blanchard to IndustryWeek. "The flexibility of the technology allows us to develop materials for all vehicle subsystems across the product line – resulting in a weight savings of more than 50 percent compared to steel." 

Purchasing decisions 

While Ford and DowAska's accord is a positive step forward for the graphite industry, it's an indication that the carbon fiber sector is one that hasn't come to fruition yet. Procurement officers working in the automotive industry would do well to advise their employers to participate in efforts similar to that of Ford's, but purchasing carbon fiber to build vehicles simply isn't viable. 

AI: How will purchasing management scrutinize the risk factor?

Procuring systems that will establish and support smart factories is one thing, but implementing technologies associated with artificial intelligence is a different kind of animal. 

In many respects, one could argue that smart production facilities' use of analytics to initiate tasks, tailor factory priorities and adjust worker responsibilities according to real-time changes is a form of AI in and of itself. However, this level of operability is just the beginning.

The impact on the human workforce 

It may be strange to associate AI with human rights issues, but this is a concern among academics, technology leaders and others participating in the IT sector nevertheless. While visions of post-apocalyptic scenarios in which a self-aware machine terrorizes what's left of humanity are far-fetched (or not, depending on who you speak to), there's no doubt that AI will have a profound impact on the manufacturing workforce. The problem is, it's somewhat difficult to ascertain what those exact changes will be. 

From a spend management perspective, if it's more cost-effective for a factory, service or other business to replace a portion of its staff with artificially intelligent machines, then all the better for the company's profitability. However, there's a human issue at stake here - the world's population is rising, which means the growing global unemployment rate will be further exacerbated if robots enter the mix. 

While gross labor replacement has been on the minds of many who think about AI's impact on the manufacturing sector, some analysts, such as authors Erik Brynjolfsson and Andrew McAfee, believe that displacement is likely to occur. The Washington Post commented on Brynjolfsson and McAfee's book, "The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies," which maintains that AI will create new jobs for workers who lost positions overtaken by machines.

That being said, this prediction isn't set in stone, and ensuring that people remain employed in the upcoming year may involve implementing certain policies. What those policies will be is somewhat ambiguous, as a monumental takeover of machine-based labor hasn't necessarily occurred, although some would argue otherwise (Brynjolfsson and McAfee cite TurboTax's impact on tax preparers, for example). 

Developing mandates, standards and best practices 

Speaking of policies designed to curtail the negative effects of AI, the Agence France-Presse referenced an open letter signed by Stephen Hawking, SpaceX CEO Elon Musk, Skype co-founder Jaan Tallinn and numerous academics and professionals that calls for renewed concentration on the ethical and societal implications of the technology. 

"There is now a broad consensus that artificial intelligence (AI) research is progressing steadily, and that its impact on society is likely to increase," said the letter, as quoted by the source. "Because of the great potential of AI, it is important to research how to reap its benefits while avoiding potential pitfalls."

The Agence-France Presse cited several instances in which legal matters will likely be integrated into the procurement and implementation of AI. For instance, there is no clear answer to the question of how to properly treat automatic weapons that may target people without discrimination. In addition, what happens when a person in a self-driving car gets into an accident? Who is held responsible? 

From a policy perspective 

Spend management officers often regard the potential costs associated with governance, risk and compliance when assessing monthly or yearly corporate expenses. To put the aforementioned concerns in perspective for those in the manufacturing, consider the legal repercussions associated with a person who sustains a grievous injury caused by an automatic forklift. Is the manufacturer that purchased the forklift responsible for the incident or is the company that made the forklift? It's a question that may have an answer in the next decade or so. 

How can US manufacturing gain momentum in 2015?

Depending on who you speak to, the United States manufacturing sector is either undergoing a second renaissance or doesn't exist at all. 

The truth of the matter is that the current state of the U.S. production economy exists somewhere in the middle of the two. While it isn't necessarily decrepit, procurement officers across the globe aren't advising their superiors to partner up with U.S. manufacturing firms. 

Technology as a major factor

The general consensus among critics is that technology is what's driving investment in U.S. manufacturing. Manufacturing Business Technology Magazine contributor John Zegers referenced a CSC Global CIO Survey, which noted that 81 percent of technology leaders at production companies believe that big data technology will have a positive effect on facility output and efficiency. On top of that, 65 percent of respondents view big data as a strategic differentiator in the space. 

Furthermore, survey participants recognized the importance of implementing systems associated with the Internet of Things. For instance, sensor technologies will support enterprises that are trying to implement smart factories, which will be remotely controlled by employees through Web browsers and enterprise applications. 

This manufacturing revolution presents a unique opportunity to U.S. manufacturing firms that are looking to expand their customer profiles. Establishing themselves as competitive partners on a global scale requires their personnel use innovative and creative ways of leveraging smart, data-driven operations. Research and development teams will be critical assets in this regard. 

Focusing on the supply chain 

Harry Moser, founder of the Reshoring Initiative, and Hal Quinn, president and CEO of the National Mining Association, wrote a piece for IndustryWeek that references the supply chain as one of the key deciding factors for purchasing management officers. 

Moser and Quinn regarded the sentiment among professionals in the National Mining Association, who noted that U.S. manufacturers are skeptical of whether mineral and metal supplies will either support or hinder domestic operations. 

However, 91 percent of executives at U.S. manufacturing firms are concerned about how supply disruptions will impact factory production. Geopolitical shifts, global conflicts and lesser obstacles can be predicted, but the accuracy of estimations are only so strong. These considerations are supporting cases for reshoring, as procurement officers would like to benefit from a shorter supply chain that isn't so asset-heavy. Concerns such as freight cost, excess inventory, risk and lead time would all be mitigated by sourcing from domestic mines. 

"According to the NMA's survey, 80 percent of manufacturing executives believe the sourcing of minerals and metals from the United States will decrease our dependence on foreign raw materials, strengthen U.S. national security, and ensure job and economic growth in America," wrote Moser and Quinn. 

Does the US have the materials needed? 

One question that is on nearly every domestic manufacturing leader's mind is whether or not U.S. mines can supply factories with the minerals needed to make electronic devices, infrastructure assets, body armor and other products. Quinn and Moser maintained that the U.S. has $6.2 trillion worth of mineral and metal reserves, but foreign companies still provide it with more than 50 percent of the materials its manufacturers require. 

Why are efforts designed to bolster the U.S. mining sector meeting so much resistance? Quinn and Moser acknowledged the importance of revising the nation's antiquated permitting system, which imposes approval times of seven to 10 years. A portion of these hindrances are created by environmental concerns - global warming and other such concerns have permeated throughout the U.S. public and impacted the way legislature is designed. 

In regard to this factor, miners will have to present lawmakers with new mineral and metal extraction methods that are significantly less harmful than practices that have been available for some time. 

How spend management can help retailers select a 3PL

Choosing a third-party logistics partner is a responsibility of the operations department, correct? It depends on who you talk to.

Nowadays, spend management professionals do more than deduce how much it costs to procure certain materials and determine how those goods are either contributing to or eating away at a company's profit margins. These specialists are responsible for estimating how much value partners and vendors can bring to a business' overall efficiency and operability. 

For merchants, selecting a third-party logistics company is a consideration that deserves heavy recognition. Distribution is an essential part of the modern retailer's operations, and can pose huge costs if a 3PL's processes and protocols are not designed for agility. The need for a supply chain partner that can respond to unforeseen demand for products and deliver them to e-commerce and brick-and-mortar customers in time is essential. 

A logistical disaster 

India's e-commerce economy is gaining momentum, but retailer reputations are suffering as a result of poor logistics practices. Bloomberg Businessweek cited one particular incident in which Laxminarayan Krishnamurthy, who lives in Mumbai, ordered a Samsung Galaxy Core 2 smartphone for his wife and received a package containing only a brick and a bar of soap. The purchase was apparently made through New Delhi-based merchant Snapdeal.com. 

Is Snapdeal.com directly at fault? Again, it depends on who you speak with. Some would assert that Snapdeal.com is responsible for this mishap because it failed to properly vet its 3PL to ensure it possessed all the assets and personnel necessary to deliver items to customers. 

In general, a lack of a robust logistics economy is hindering India from becoming an e-commerce giant. The news source cited "inadequate warehouses, lack of skilled and reliable workers and too few planes" as the signature problems facing India's merchandising sector. If these issues were resolved, Web retailers have estimated that sales could increase 70 percent in 2015, making it a $6 billion industry. 

What to look for in a logistics company 

From a spend management expert's perspective, the aforementioned situation involving Krishnamurthy is completely unacceptable. Tangible financial losses aside, Snapdeal lost a customer who could have been at the center of a lengthy and profitable relationship. Worst of all, Krishnamurthy's comments regarding the ordeal were shared more than 21,000 times,  reaching a large number of potential customers who may refrain from visiting Snapdeal.com in the future. This situation represents the true loss Snapdeal's logistics partner has imposed. 

With all of this in mind, how should a spend management professional assess a 3PL's capabilities? Adam Robinson, a contributor to supply chain solutions developer Cerasis' blog, brought up three questions retailers should ask before setting up a long-term contract with a logistics company: 

  1. Does it have enough assets? It's likely that merchants won't encounter a logistics provider that owns more warehouses than it needs. That being said, these buildings should be strategically placed in areas characterized by frequent commerce and consumerization. From there, visit a few of these facilities to get a sense of how the logistics company leverages technology and staff to expedite product delivery.
  2. Are its personnel capable? If a retailer speaks to truck drivers and distribution center employees who are knowledgeable about the business and have efficient communication skills, it's on the right track to finding a good 3PL. From there, merchants should speak with the 3PL's human resources department to understand the company's disciplinary policies, training initiatives and workflow habits. 
  3. What technology does it use? IT assets can either make reporting, inventory management and product registration incredibly easy or painstakingly difficult. If the 3PL's use of software is conducive to distributing products in a lean, accurate fashion, then the merchant should press further to see if any faults exist. 
Spend management during 'crisis mode'

To some professionals, when a continuous list of cost-cutting initiatives hits a company, it means the firm has entered "crisis mode."

The strategic approach 

First off, endeavors designed to reduce expenses shouldn't be associated with a time in which a business may face bankruptcy, although this may be the fear among the particularly anxious. What's more frightening to business leaders is that cost-cutting often results in poor employee morale and resource deficiencies - i.e. people are not given the capital or time they require to conduct operations efficiently. 

Believe it or not, putting a positive spin on cost-cutting endeavors can go a long way in helping the professionals within your business identify potential opportunities to create operational advantages. As opposed to sending out an email to personnel offering "helpful tips" for reducing expenses, taking a step back and assessing how a company is putting its money and other resources to use is a best practice. 

The real value of spend management comes not from creating an accurate monthly expense report, but from assigning worth to purchased resources. For instance, suppose a purchasing officer at a manufacturing firm can see that materials produced by a particular supplier are negatively impacting the company's sales figures. Where's the connection? The supplier's goods are quite cheap - in every sense of the word. Therefore, the business' finished products made with those substandard materials have lost their quality, meaning fewer people are buying those items. 

The black hole of cost-cutting 

Given the example mentioned above, it's clear to see how spend management can be leveraged to not only reduce expenses, but actually improve a company's bottom line as a result of making changes in investment. The strategy differs from cost-cutting in that the latter approach doesn't involve any thorough scrutiny - a cost is identified and those in charge implement any changes they deem necessary to mitigate it. 

This is where businesses can get into trouble. John Dyer, president of JD&A and contributor to IndustryWeek, identified what he calls a "death spiral" of cost-cutting: 

  • Demand exceeds capacity
  • Customer experience suffers
  • Sales orders begin to drop
  • Prices are lowered to keep sales orders up
  • Costs are reduced to meet profit goals
  • Spending cuts lower capacity

And so the cycle continues, with resources cut to the bare minimum. When it comes to workflow and operations, seeking the least amount of money or resources a person needs into order to perform his or her duties can lower job performance, which ultimately negatively impacts the business. 

Good spend management practices to keep in mind 

In this respect, the mere attitude with which companies employ spend management in contrast to how they tackle cost-cutting is, in many mays, what distinguishes the two. What are some spend management practices that make this approach a viable alternative to cost-cutting? Digi-Key contributor Bridget McCrea named a few, which are listed below:

  • Make educated purchases: This should go without saying, but knowing what you're buying is a key component of what helps a company derive full value from its assets. This type of analysis can be conducted at the supplier relationship management level when procurement officers speak with representatives about their products, services or unfinished goods. 
  • Scrutinize indirect expenses: Offices, factories and other facilities require upkeep and maintenance, which requires budget allocation. Maybe there are ways in which personnel are approaching this responsibility that make repairs more expensive than they need to be. 
  • Audit your suppliers: Product quality can suffer if suppliers are not consistently made accountable for holding up their end of the bargain. It's not about these partners growing lazy or careless - sometimes management implements a new process that changes production.

With these considerations in mind, companies will be well positioned to reduce expenses while maintaining quality control.