Robert A. Rudzki, contributor to the Spend Matters blog, brings up a great point in a recent post. “’Strategic’ is perhaps one of the most overused (and misused) terms in business today,” he says. “Simply adding a few bells and whistles to conventional purchasing and then slapping the word strategic onto the process … is not the same thing as adopting the process as it is intended.” This holds especially true when companies are seduced by the “quick fix,” rocked by changes in leadership, or lulled back into conventional purchasing practices.
We couldn’t agree more. In conversations with companies interested in a strategic sourcing solution, we hear the same pain points over and over. “We’ve tried sourcing events in the past, but they never gained traction.” “We don’t really know where to start with a sourcing event.” “Things tend to just fall apart after we’ve collected bids.” “We select the lowest price, but the savings often aren’t realized.” “It could take us months after an auction to actually award our business.” And so on.
What these companies are missing is a true front-to-back sourcing strategy. They have the middle parts strategized – selecting suppliers, running an auction, evaluating the results of the auction – but the most vital aspects of sourcing may actually take place before and after the bids are solicited and collected. The front end of a strategic process is Spend Analysis, and the back end is Decision Optimization.
Having a powerful sourcing team and tool means nothing if you don’t have an effective strategy for what to source, and that means knowing your current spend patterns. You have to know what you’re buying, from where, from who, and so on in order to save money and make the investment in sourcing tools a good one. You can ensure stakeholder buy-in and an increased chance for savings success if you focus on correcting documented issues — sourcing items that have too many suppliers with a high amount of spend, items that don’t have buying consistency across distribution centers, and so on. Spend analysis gives you this type of visibility into your areas of need.
Award decisions can cripple a sourcing effort after the fact, unless you use decision optimization techniques to guide your decisions. Lowest cost may not always be the optimal award scenario for your business. Freight issues, quality issues, and so on can wipe out any projected savings you were expecting unless you factor these issues into your award decisions. An optimization tool can automatically calculate how different scenarios affect your award decisions, based on supplier attributes, award constraints, and so on. Considering this vital stage can mean the difference between dragged out, lackluster events and quick savings realization.
Don’t, as Rudzki advises, become stuck in conventional purchasing practices because you aren’t factoring in spend analysis and optimization into your sourcing decisions. These tools may be the key to putting “strategic” back into your sourcing.
Cloud computing is changing the way IT leaders deliver IT services and value to their customers. As companies learn about the value of the cloud through pilot projects, they gain insight into the technology, its commercial benefits, and see firsthand the changes that must be made to fully take advantage of the cloud. I recently wrote an article on this topic for the Cloud Computing Journal outlining the ways to maximize the benefits of cloud computing.
In my view, the key to achieving these benefits is with an integrated, centralized IT Service Management (ITSM) system dedicated to demand management, capacity management, and service integration – service management functions that are typically less important to organizations than the simpler service desk and incident management tasks.
In this second post on preparing your health care organization for cloud computing, I will address how health care businesses subject to HIPAA should carefully select a service provider with the capabilities to address HIPAA Privacy, Security, and Audit as well as provide secure, scalable, low cost IT infrastructure.
HIPAA’s Privacy Rule requires that individuals’ health information are properly protected by covered entities, meaning that patients’ “protected health information” (PHI) cannot be transmitted over open networks or downloaded to public or remote computers without encryption. Encrypting data in the cloud include standards for the encryption of all PHI in transmission (“in-flight”) and in storage (“at-rest”). The same data encryption mechanisms used in a traditional computing environment, such as a local server or a managed hosting server, can also be used in a virtual cloud computing environment as well as a complete firewall solution.
The Security Rule requires covered entities to put in place detailed administrative, physical and technical safeguards – such as access controls, data encryption, and back-up and audit controls – to protect electronic PHI. While data flowing to and from the cloud should be safeguarded with encryption, data that comes in contact with administrators or third-party partners may require different control mechanisms. To help you comply with HIPAA’s Security Rule, policies and processes regarding data and how to implement authentication, access, and audit controls must be in place to reduce the risk of a compromise from outside. HIPAA’s security safeguards also require:
In-depth auditing capabilities,
Data back-up procedures, and
Disaster recovery mechanisms.
Service providers must be able to address these requirements. In designing a HIPAA-compliant system, you should put auditing capabilities in place to allow security analysts to drill down into detailed activity logs or reports to see who had access, what data was accessed, etc… This data should be tracked, logged, and stored in a central location for extended periods of time in case of an audit.
A major goal of HIPAA is to assure patients that their health information is properly protected while allowing the flow of information needed to provide and promote high quality health care for the public’s health and well being. The development of a business-focused cloud computing strategy, internal corporate data policies and an accompanying transformation road map can lead to the successful implementation of HIPAA applications and infrastructure in the cloud computing environment.
Don’t forget to sign up for the “Procurement Leadership in the Perfect Storm” webinar on August 18, 2010 at 10 a.m. EST (NYC Time). Iasta is co-hosting the webinar with Procurement Leaders. Mike Williams, Senior Director of Strategic Sourcing-Energy of Office Max, and Matt McCarrick, Managing Director of Professional Services of Iasta, will both speak about procurement transformation. Join in as they help you raise the profile of sourcing and procurement within your organization during this ‘perfect storm’ of opportunity.
Register today at the attached link below. The webinar will also be available online for those who register up to 12 weeks after August 18, 2010.
The current economic crisis that continues to negatively impact global markets has dramatically altered the competitive landscape for corporations. Every day, the news is the same. Demand, revenue, profits, and shareholder value are all down while the costs and risks of doing business are all up.
This “Perfect Storm” of economic conditions has created a once-in-a-career opportunity for procurement leaders to change the storyboard around procurement. By transforming the role of procurement from a cost center functionary to a must-have strategic partner, you can seize the opportunity to redefine procurement as a key driver of increased profits, market share growth, and competitive differentiation.
In this webinar we will share four basic strategies that underpin a successful procurement transformation:
1. Structure and plan a procurement transformation for your enterprise;
2. Package the initiative to ensure cross-functional executive sponsorship;
3. Socialize and sell the initiative to the leadership of every business unit; and then
4. Successfully execute the transformation and forever change procurement’s role in your enterprise
We will also share some tactical tools that can help achieve your transformative goals:
- Increase the amount of spend under management
- Leverage new technology to conduct opportunity & savings assessment
- Develop and refine the existing procurement organizational structure to include a center of excellence
- Establish cross-functional team to leverage resident subject matter experts
- Fully optimize every dollar spent on external goods and services
- Deliver implemented savings to the company’s bottom-line
Join us for an interesting and interactive webinar that utilizes real-world, real-time information and experience that will have you transforming procurement in your enterprise in no time! Click here to sign up.
Cloud computing is changing the way IT leaders deliver IT services and value to their customers. As companies learn about the value of the cloud through pilot projects, they gain insight into the technology, its commercial benefits, and see firsthand the changes that must be made to fully take advantage of the cloud. I recently wrote an article on this topic for the Cloud Computing Journal outlining the ways to maximize the benefits of cloud computing.
In my view, the key to achieving these benefits is with an integrated, centralized IT Service Management (ITSM) system dedicated to demand management, capacity management, and service integration – service management functions that are typically less important to organizations than the simpler service desk and incident management tasks.
As cloud computing continues to change how IT services are delivered, it will be increasingly important to emphasize the need for strong service management and governance frameworks.
Actual demand for our product is greater (or less) than forecast-ed?
My facilities have different quality standards for the same product?
I need to select a “green,” “low-cost country” or “diversity” supplier?
My preferred suppliers have capacity or lead-time issues?
I have only 10 days to decide the best award for five locations from 10 suppliers, 20 line items and hundreds of bids?
A successful sourcing project does not end with an auction; it ends when the awarded supplier delivers the correct product at the right time, place and cost. Implementation delivers the savings. Yet, at many companies, the “what-ifs” get in the way of realizing significant savings and product quality improvements. While an average sourcing project may take six to eight weeks to prepare and execute, the award decision can often take an additional six to eight weeks, not including new supplier verification. The additional time invested in award analysis can critically affect a company, especially if the company can obtain cost savings in two weeks rather than two months. In one example we know of, a company estimated that it cost them $1.6 million per month for an unimplemented sourcing project.
So why is it so difficult to award contracts when the savings potential is so obvious? Another company ran a $24 million auction for printed circuit boards. The sourcing team ecstatically presented $9.6 million in identified savings (an overall savings of 40 percent, with 70 percent in one lot alone). However, after six months, the actual savings delivered was $0. Why? Too many what-ifs got in the way. The joint sourcing and stakeholder team could not agree on the correct award scenarios, therefore, no decision was made.
Price factors are the easiest to analyze and compare. A sourcing analyst can calculate totals and summarize and rank suppliers for easy comparisons. But it is the other factors that prolong the decision-making process and often override the price factors. The key to a speedy award decision and implementation is managing the “what-if” factors.
The Six “What-if” Factors
There are six basic “what-if” factors, or risks, that affect award decisions and implementations. Some sourcing projects are infused with all factors, others just a few. Regardless, if not effectively managed, they can dramatically lengthen (or stall) the entire award decision and implementation process.
Price issues: These issues are typically the most obvious and easy to manage since they are quantitative. They include any cost associated with the total product value such as product, freight, packaging costs, rebates, discounts and payment terms.
Quality issues: Risks associated with quality are a bit more difficult to manage because some of them are assumed and not clearly articulated. Where it becomes tricky is when different stakeholder groups have different quality assumptions for the same item, such as with the printed circuit board bid.
Capacity and lead-time issues: It is critical that companies have capacity assurance so they can meet the demand of their customers. Juggling supplier capacity issues can be very time consuming, especially when product forecasts can swing dramatically up or down.
Regulatory issues: There are regulations such as accounting (Sarbanes Oxley), distribution and product ingredient quality (lead paint, melamine), and product sources that can affect decision making and must be managed.
Political issues: Though global politics have some impact, it is the internal corporate politics that carry the most weight in all sourcing decisions. Examples of these issues are sensitivities to preferred vendors (due to partnerships), diversity and green vendors, in-sourcing and internal competition between business units.
Supplier strategy issues: In addition to choosing a low-cost supplier, there are other supplier strategies that may need to be evaluated along with cost. These strategies include multi-source versus single-source, low-cost country, supplier consolidation and relative market strength of the supplier (monopoly).
Our second post in this two part series will focus managing the “What if’s.”
Now that we are faced with the biggest economic upheaval in over 30 years it seems appropriate to carefully reevaluate the use of Price Indexing. The alternative is to leave all pricing initiatives to your sellers. While this may be reasonable for small value and noncritical spend it is extremely risky for anything strategic.
One of the critical challenges facing sourcing professionals is the determination of pricing mechanisms to deliver best value looking ahead to next quarter, next year and the next decade. This need is magnified by today’s onslaught of price volatility combined with future price and supply uncertainties. Buyers in all sectors need to examine prices not already tied to indexes and seriously question their risk. Likewise those prices already tied to indexes should be closely reexamined to determine if the index mechanism should be revamped.
HISTORICAL PERSPECTIVE Sourcing professionals have used various published indexes to determine the change in pricing for commercial materials and services for decades.
Reliance on such pricing mechanisms exploded in the mid-1970’s in the wake of widespread market turbulence. Buyers in all sectors of the economy faced unprecedented increases in crude oil pricing as well as totally unexpected and large-scale supply shortages. The situation was further complicated by government price controls, severe cash flow and credit concerns and other market distortions. This “perfect storm” scenario sent buyers and sellers scrambling to protect against inflation, price volatility and supply uncertainty.
The use of price indexing took what was deemed to be the unknowable and uncontrollable out of the equation with the goal of protecting margins and restoring some measure of predictability on both sides of the buyer-seller relationship. Fortunately the upward spiral of inflation and supply uncertainty did not last forever but the widespread use of price indexing endured.
SETTING PRIORITIES At a time when sourcing professionals are already stretched to the limit, there is good news with price indexing.
With limited time and effort you can perform a fairly reliable needs assessment to give you a clear picture of whether price indexing is a top priority. It will also help you quantify the magnitude of spend that is impacted by a relatively small array of key cost drivers.
This in turn enables you to focus further effort to achieve maximum gain
Next month we will detail the recommended steps in a needs assessment to help you determine the best opportunities for establishing or reevaluating your price indexes.
A recent article from the New York Times on the state of shipping around the globe caught my eye. It seems as though retailers are feeling the pressure.
Retailers are now seeing an even larger effect from the recession: they are in bidding war to ensure that their goods are delivered to store locations.
“The grills shaped like kegs and toolboxes, ordered for a Father’s Day promotion at Cost Plus World Market, arrived too late for the holiday. At the Container Store, platinum-color hangers, advertised in a summer sale catalog, were delivered days after the sale began. At True Value Hardware, the latecomers were fans and portable chairs.”
Although retailers are slowly increasing their demand for freight to ship their goods, the freight industry has been slow to increase its capacity. This has caused a bottleneck of goods that can’t find their way to their intended locations on schedule.
“The problems stem from 2009, when stores slashed inventory. With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009,” according to AXS-Alphaliner, an industry consultant.
With fewer cargo ships and containers for space, retailers are looking to the sky to move their finished products. This is the main reason behind FedEx’s recently revised 1st quarter earnings estimate. The company is benefiting from desperate retailers trying to move goods on time in any way they can.
In order to understand the scale of this bidding war and its effect on retailers, we can simply look at the spot rate for a 40-foot container from Hong Kong to Los Angeles. Prior to the recession, around July 2009, the spot rate was approximately $871. Today, that same shipment costs a retailer around $2,614.
Supply and demand economics are vast at work in the global shipping market. One of the retailer executives from the article suggests an alternative his company is using to hedge costs. “To play it safe, Jeff Siegel, the chief executive of Lifetime Brands, has started scheduling items to arrive as long as three months before they need to be in stores. That means a higher cost for holding inventory than usual, but interest rates are relatively low, and he would rather have the goods in hand.” Otherwise, you may be one of the unfortunate retailers who don’t have products on hand for a big promotional event.
Iasta, the leading provider of eSourcing software and solutions, was titled as the 10th Fastest Growing Private Company in Indiana for 2010 by the Indianapolis Business Journal (IBJ). A third time honoree, Iasta boosted its three-year growth rate at 134 percent.
The report profiled Iasta’s founding’s, current offerings and future outlook.
Ten years ago, four technology professionals discovered a niche with potential: providing software for companies to bid and negotiate with vendors. Ever since, it’s been profit and growth for Iasta.com.
The IBJ ranks companies by their revenue growth over the last three consecutive years, which must exceed $1 million annually. In 2009, Iasta ranked 17th and in 2008 they ranked 14th. The award is based on revenue growth of the last three consecutive years. Iasta has thrived in a market where many others have been forced to make budget cuts and layoffs. “We’ve established a lot of credibility and there’s a lot of growth yet to be had,” said Bush.
Iasta experienced very rapid growth in its younger years at 80 to 90 percent a year. These days, the company still grows at 30 to 40 percent annually. Bush attributes the success of Iasta to flexibility and high quality in both software and services.
This is the first in a series of posts discussing the history of, business case for and strategy behind supplier performance management.
Before we can get to the end goal of creating an SPM strategy, we must understand the factors in our supply chains that have caused SPM to become an enormously important part of our processes. Over the past decade, economic globalization has allowed companies to reach suppliers in previously untapped parts of the world. With the ability to purchase goods and services at lower costs around the world, we now rely more on outsourced suppliers for these goods and services, which has increased our supply chain risk, the complexity of our supply chains and the globalization of our businesses. These shifts in focus have changed a company’s view of its suppliers as a cost to a revenue source to hold down the bottom line.
The combination of these factors across a globalized supply chain means that companies must maintain strong, viable supply chains in order to maintain strong, consistent business performance to protect their bottom lines. Effective, smart supplier performance management allows us to achieve these goals.
So does this mean a company needs a perfect supplier scorecard that makes its metrics look good? NO. Supplier scorecards are one small, though important, piece in the intricate puzzle that makes up supplier performance management. SPM involves aligning the organization, enabling strong business processes, developing meaningful supplier scorecards, and building actionable supplier improvement plans.
But at the end of the day, SPM is mainly about finding ways to improve your suppliers’ performance to reduce costs and risks, while increasing supplier value. Supplier performance improvement could take the form of making more on-time deliveries instead of shipping a few days early, which increases your inventory costs. Or suppliers could decrease lead time for delivery, which lowers your production time. A strong SPM program allows a procurement team to have visibility into performance issues like these so it can correct them with the supplier, while continually building a strong, mutually beneficial business relationship.
For more information on Supplier Performance Management click here to download our white paper.
Speculation that Germany and other northern European nations may launch a new breakaway euro means businesses must focus on how they buy goods and services, say procurement experts ADR International.
Robin Jackson, CEO of ADR International, says exchange rate movements present risks and opportunities for procurement professionals.
In the latest issue of the ADR International eBulletin, he says changes in exchange rates can mean huge differences in the prices paid for goods and services from abroad – in favour of the purchaser or the supplier.
He says: “Recently the markets have focused on the debt of the eurozone and UK with the resulting weakening of those two currencies.
“But as we move forward more attention may be focused on the debts and associated default risk of other nations such as Japan and the US. The result will be more volatility and more challenges for procurement. And with potentially massive implications of a new currency in Europe, it’s essential to be prepared.”
Fred Parkinson, senior consultant at ADR North America, says companies should examine their internal relationships in the wake of the world recession.
He writes: “Engaging stakeholders is not that complicated, but in practice steps are often overlooked, or derailed when they hit an obstacle. So it is worthwhile to review a few key ideas and look for solutions to potential trouble spots.”
Parkinson suggests a systematic process for reviewing stakeholder involvement including identifying a leader for the project, establishing clear roles for team members, deciding on a timeline and setting up a communication system within the organisation.
Rebecca Howard, Director of ADR Learning, the training and development division of ADR International, says asking suppliers to suggest ways they could improve their performance - rather than setting targets for them - can produce good results.
Drawing on the work of motivation guru Dan Pink, she admits that giving suppliers a sense of autonomy by asking them to say how they should be measured may be a radical concept in contract management.
She says: “Ultimately performance metrics must be based on what matters to you in your organisation’s category plan. But suppliers can provide innovative approaches to how our goals can be achieved.”
I recently had the opportunity to chat with Cognizant’s Ramesh Gudalur, Head, Global BPO, and Paul Roehrig, Director of Strategy for Cloud Business Solutions, regarding the implications of Cloud Computing for BPO.
Bill Huber: Frame the big picture for our readers… How does Cognizant see the cloud impacting the way in which BPO services are delivered?
Paul Roehrig: Broadly speaking, multiple converging contextual forces such as the reset economy, intense businesses pressures, the increase of millennial workers, and the maturation of cloud-enabled technologies and collaboration have created a set of force vectors causing end users to search for new delivery models.
Most enterprise decision makers will not suddenly move all technology and process services to a cloud-based delivery model.
Our belief is that cloud based solutions are beginning to offer disruptive advantages when woven together with more traditional delivery models. Looking at services as “cloud” or “not cloud” might not be the best direction to take things. Very few enterprise decision-makers are ready to suddenly throw everything into a cloud delivery model. Smart concerns about security, the ROI of cloud services, legacy applications, etc., will continue to keep decision-makers cautious about widespread sudden leaps to cloud services. But in spite of concerns, cloud-enabled next-generation solutions can offer disruptive levels of productivity improvement and business enablement. We believe that our role as a service provider is to help customers appropriately deploy cloud-based solutions and to navigate around major issues and questions about security, ROI models and the true value of cloud-enabled solutions. Cognizant sees its role as an innovator/integrator/guide to help customers find the optimal balance of cloud enablement with traditional delivery methods.
Cloud enablement cuts across all lines of service from a horizontal and vertical business perspective. Increasingly, Cognizant sees itself integrating offerings such as Software as a Service (SaaS), Infrastructure as a Service (IAAS) and consulting and analytic services along with BPO to deliver an end-to-end solution for key processes. The real “over-the-horizon” take on this is that next-generation deals are just beginning to emerge at the enterprise level. These deals demonstrate a new class of solution weaving together infrastructure, applications, and business process services, and delivers business outputs back to customers via more of a consumption-based billing model. These cloud-enabled vertically aligned solutions require deep understanding of the business and leverage global service delivery and a robust alliances ecosystem to deliver disruptive levels of value to customers.
BH: What example can you use to illustrate how this happening?
PR: We have some examples of these solutions in clinical data management and analytics as a service in our Life Sciences business, and we’re actively pursuing more of these next-generation deals. Several other service providers also have examples of these solutions, and industry analysts and advisory firms are also indicating that these business process solutions are gaining traction. Based on a foundation of cloud services and traditional capabilities from providers, customers have a new opportunity to create differentiation based on innovation leveraged into more progressive service offerings. It’s early days, but these are real solutions delivering real value today—not just slideware.
BH: How is Cognizant incorporating this into its broader strategies?
Ramesh Gudalur: We don’t want this to be a flavor of the day and are using the cloud as a key infrastructure to drive thinking and improve capabilities to our customers in capital markets, life sciences, health care, finance and accounting, clinical data and other areas. The cloud is a component in our ability to create a very differential offering with a view toward client impact.
For example, envision a SAAS platform on which end users can do insurance processing or end user rights management. These solutions, as good as they are, are only an application and not an end-to-end solution. There are many pieces missing from a pure SaaS play that a service provider can and should add to the solution. Depending upon the solution, the client could still have complete access to that platform while achieving a much higher level of operational performance.
In vertical processes there is a need to change processes to drive the next level of value. For example, in health care claims, new processes have been implemented to put multiple types of claims together and analyze them concurrently rather than in a sequential manner, driving a whole new level of business intelligence. As industry wrappers are created that can change processes, you actually achieve changes in the process available on the cloud that will affect multiple companies. The result is the avoidance of significant reinvestment by clients. Buyers need to unbundle processes in a different way to drive increased value. For example, they now have the opportunity to think about “Claims in a Box” type solutions and to focus on the insights from analytics of the data rather than being a claims processor. This will help them to move from a claim-centered view of processing to an issue-based view of processing, driving higher fraud impact identification and mitigation, for example.
BH: What should clients do differently in going to market?
PR: There is an opportunity for advisors like TPI and others to help drive a new view of cloud-enabled business process services within their clients. Advisors can help their clients to understand the change to solution sets and offer clients new ways to better take advantage of these emerging technology and commercial models. IT decision-makers are starting to rightfully conclude that it is time to start thinking differently about how to utilize technology. Those advisors who keep everything entirely templatized may put their customers at greater risk because value could remain locked in the nostalgic inefficient process and technology. Cloud-enabled technology and commercial models can also provide benefits through business analytics and lowering run rates. Business and technology decision-makers should start doing several things now to take advantage of this emerging trend. First, build a vision—not just slides—for next-generation sourcing solutions. It’s a great time to clarify and refine what the true technology and business goals are and then wrap the sourcing strategy around those goals. Keep in mind that help is available. Service providers, advisory firms, etc., are all positioning to help navigate new service models and business implications. Also, get smart about next-generation solutions. Pick less-critical functionality—storage, email, platform-as-a-service (PaaS) and SaaS offerings seem to be the most common pilots—and get smarter about cloud services by trying them out. Then go search for true business solutions.
![[del.icio.us]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/delicious.png)
![[Digg]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/digg.png)
![[Facebook]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/facebook.png)
![[Google]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/google.png)
![[Reddit]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/reddit.png)
![[StumbleUpon]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/stumbleupon.png)
![[Technorati]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/technorati.png)
![[Windows Live]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/windowslive.png)
![[Yahoo!]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/yahoo.png)
![[Email]](http://www.esourcingforum.com/wp-content/plugins/bookmarkify/email.png)