Fans of Beck will immediately recognize this as half of the chorus from Beck’s “Where It’s At”. Regular readers might think I’ve finally flipped my gourd, as this can’t possibly have anything to do with sourcing. However, even though literally it has nothing to do with sourcing, metaphorically, it has everything … and it provides a nice lead in to this blog entry.
In good sourcing, “There’s a destination a little up the road”. Sourcing professionals know what they need to do and what they need to accomplish. “Jig-saw jazz and the get-fresh flow” … or … world class sourcing organizations got it going on. “Pick yourself up off the side of the road” … challenges are opportunities and there’s never a no win-situation. I could continue, but you get the point.
What we’re all really concerned about is “Where It’s At”. What constitutes a solid basis for successful sourcing? What are the issues at hand? Where can we find them all in one place?
Turns out a really good start is The Hackett Group’s research agenda for 2006.
Increase procurement’s ability to drive significant levels of spend cost reduction and spend cost avoidance
Improving spend management by increasing the visibility of enterprise spend behavior
Aligning procurement’s goals with those of the business
Working more effectively with suppliers
Driving organizational excellence
Improving global sourcing and supply management
Applying technology to the specialized requirements of the procurement organization
Driving process excellence in strategic sourcing and purchase-to-pay
Raising the skill levels of procurement staff
Of course, these are only the questions, and we here at Iasta are thrilled to have most of the answers.
our on-demand SmartSource e-sourcing platform offers significant process time reductions and sourcing process improvements that can help you considerably increase the number of strategic sourcing efforts you undertake, which drives cost reduction and avoidance
capturing all of your events in one e-sourcing tool greatly increases visibility and our contract management and dashboard capabilities will let you know what you need to source when
a centralized tool that can be accessed by all stakeholders goes a long way to aligning procurement goals across the organization
web-based tools streamline supplier interactions
SmartSource is built on a complete strategic sourcing process, which will be detailed in a forthcoming whitepaper, that drives excellence
our web-based capabilities allow you to more easily undertake global and LCC sourcing initiatives
our technology was built from the bottom up to serve procurement and sourcing professionals and meet their needs
the foundation of the strategic sourcing process our SmartSource product is built was designed around best practices and our new decision optimization enables the optimal TVM (Total Value Management) award every time
our forthcoming next generation auction and decision optimization tools will assist in raising sourcing and procurement skills to the next level
In other words, here at Iasta we’re on the same page as The Hackett Group, home of the legendary Pierre Mitchell. We got “Two Turntables and a Microphone”.
We have seen a very significant increase in customers and interest from the retail sector and I recently came across this article which is a broad overview of the industry and trends. Of particular interest:
4. Preponderance of web driven sourcing.
Retailers will use Systematic and Spot sourcing from the many B2B sites to meet their requirements of core merchandise as well as peripherals.
Considering the very broad things discussed in the article, the fact that sourcing processes was listed 4th, I feel is very important and interesting. Although not retail specific, this article also came out recently which played on the executive management angle, which is demanding change and innovation to drive corporate growth. The first sentence states, “In a study unveiled by IBM Business Consulting Services, 65% of the world’s top corporate CEOs declared that due to pressures from competitive and market forces, they plan to radically change their companies in the next two years. “
For those who do not know, I live in Indianapolis, and we have had a recent wave of exciting price fixing scandals in the construction industry which I have run across in local news.
I have found these events to be especially interesting because we have traditionally had more problems with suppliers in the construction industry than any other. Suppliers are very resistant to bidding and have very active associations that strongly urge all members to refuse bidding. Eventually, it works and the suppliers break rank but it is a harder road to hoe than just about any other type of bid.
Here in Indiana, the construction lobby was able to get written into Indiana purchasing code that construction equipment cannot be bid through reverse auction. Those are some powerful and organized groups to be able to pull that off.
Fortunately strategic e-Sourcing isn’t just about reverse auctions, its about better decision making support. When faced with suppliers such as these, it makes sense to have a strategy that includes multi-round sealed bids followed by decision optimization. A strategic e-Sourcing strategy without a reverse auction could still result in the following benefits:
lower costs
simplification of process by using 1 means to distribute, gather and analyze sourcing info
shorter cycle time by using 1 means to distribute, gather and analyze sourcing info
centralized documentation on all supplier intractions
centralized documentation of buyers decision making process and constraint analysis
“It’s Not Easy Being Green.” Especially if you are Kermit the Frog. Or at least if you were Kermit the Frog up until recently. You see, if some people, especially the Neo-Greens, have their way, Kermit might soon get to change his tune … and not just when he’s driving the Ford Escape Hybrid.
We refer you to the latest issue of Wired, which has, among others, an article entitled “The Next Green Revolution” that references a new growing trend, especially in some of the more enlightened cities in the east - green roofs.
For us Americans, this might be one of the most confounding ideas to ever crash onto our sophisticated minds, with out love of sleek, shiny, metallic objects, concrete forms, and glass displays, and our innate belief that technology transcends nature. But from a strategic sourcing point of view, it is arguably one of the best ideas ever. Why?
First of all, I’d like to refer you to an earlier blog entry on “Green Suppliers” about Interface Inc. that was able to save $260M from waste reduction initiatives from going green. Environmentally processes save energy and materials - and that saves money. Green roofs also save energy and materials. The roofs provide a balanced climate barrier that helps to keep heat in during the winter and heat out during the summer. Also, what better material to fend off the forces of nature and erosion then nature itself? They also benefit the environment by reducing the level of atmospheric carbon, which helps to counteract our increased production thereof. Simply put, green is the way to go, and in a perfect world, which likes to save money, Kermit should be able to change his tune … for good.
We were recently asked why the ISM was changing their well known CPM certification to a new format called the CPSM. After some digging and asking around, I should have gone directly to the ISM site that sponsors this exam as they have provided a lot of detailed information regarding the change. I think this Internet thing is here to stay…
I have recapped some of the information below -
The ISM website stated that they are changing the format of the CPM test to focus on topics that have grown in importance over the past few years such as increasingly complex and strategic supply relationships and a greater reliance on technology. Citing their responsibility to raise the professional and educational standards they expect from their members they will be moving to this new certification.
Some of the following job titles will benefit from the new CPSM qualification: Strategic Sourcing, Commodity Management, Logistics Management, Supplier Relationship Management, Project Management, and Supplier Diversity Management.
The CPSM exam will focus on the following categories:
* Section A - Foundation of Supply Management
* Section B - Effective Supply Management Performance
* Section C - Leadership in Supply Management
There is no need to be concerned if you have already received your CPM as it will still be valid and you can take the shortened test for your CPSM for the next 10 years.
A full explanation can be found at ISM as to why they are changing the certification from a CPM to a CPSM and they have also provided a very in-depth FAQ.
There is a recent article regarding the environmental policies in sourcing at Interface, Inc., which is the world’s largest carpet manufacturer. It mentions how the company was able to save $260m from waste reduction initiatives.
Getting information from suppliers about their environmentally friendly processes are exactly the type of responses that should be collected, weighted and scored in an eRFx document. Many of our clients have sections in templates that are devoted to questions such as these. Also, thinking long term there are many ways to save money over time with the implementation of green policies as documented in the article.
Paul Paydos, Senior VP for Planning and Purchasing stated, “You’ve got to quit thinking of yourself as some stand-alone organization. You are your entire supply chain—from mine and wellhead to the incinerator and landfill. And if you want to begin to reduce your environmental footprint, the quickest way to start is to find those suppliers who’ve already reduced theirs.” It sounds like Interface has some very good strategic thinking about their supply chain which is promoting environmental responsibility and savings.
In a recent post, we quoted a recent Purchasing Magazine article that stated analysts expected an upward trend in base pricing in 2006 and that freight buyers would continue to pay high fuel surcharges.
Recently, Purchasing Magazine posted this article that indicated that rates have already increased between 6.8% and 8.5% on some major railways, compared to the average increase of 10% for all of 2005! And, in an even more recent post, they indicated that the 36% rise in retail gasoline prices and the 19% inflation in diesel fuel costs have resulted in increasing fuel surcharges across the board. They noted that Swift Transportation and J.B. Hunt Transport Services collected a combined total of $189 M in fuel surcharges, up 53% from last year.
If this trend continues, overall rail rates could rise even more then predicted (and more then double freight rate increases in 2005) when you consider that Union Pacific and Burlington Northern Santa Fe alone collected $2.12 B in surcharges last year (which was up 312% from 2004)!
What does this mean to you? If you don’t already have a freight strategy in place, you should formulate one ASAP. If your volume is insufficient to negotiate mid to long term contracts with preferred carriers, then your supply strategy should include suppliers who maintain their own fleets or have agreements in place with major carriers and can negotiate favorable contracts. Furthermore, the expected costs should be factored into every affected purchasing decision as the impact may be considerable when considering bids from geographically dispersed suppliers.
Hot off the Bloomberg(.com) press - the OECD expects a 2007 economic global slowdown after raising 2006 forecasts as central banks lift borrowing costs and oil prices continue to climb.
In particular, growth is expected to fall to 2.9% next year from 3.1% (while inflation is expected to slow to 2% after accelerating to 2.2% this year). It may not sound like much, but it’s 6.5% on a global basis. If you are in a low margin industry, a 6.5% drop in sales could be quite significant.
Moreover, it predicts that the US economy will slow to 3.1% from a projected growth of 3.6% this year, a drop of almost 14%! Therefore, you should start implementing tightening policies, starting with strategic sourcing Total Value Management best practices, now to insure that you are in good financial shape well before the projected slowdown hits. That way, while your competitors are scrambling to make up unexpected deficits, you’re taking your profits to the bank, ready to spring back into action when the economy heats up again. That’s sound sourcing.
Last Monday I posted a blog entry on “Supply Management or Spend Management” about the “phrase war” between Tim Minahan and Jason Busch that just … won’t … die!
Yesterday, Jason posted his final volley. Both have made excellent points, and these are two blog threads that you should not miss.
It seems Jason believes that Tim is overemphasizing the cost reduction aspects of Spend Management, which Jason says is really about “optimizing spend”, and that supply management is too limiting because it is overly sourcing centric, material focused, and not appropriate from other spend perspectives, such as services. In his defense, Tim says that he understands the holistic focus of spend management, but that it is only a stepping stone to strategic supply management which goes beyond simply leveraging spending power and improving operations to the development and nurturing of supplier relationships that will drive continuous improvements in total costs and performance (as well as joint competitive advantage).
So what do I believe? Again I’d have to say they are both right while they are both wrong. Everything they say is true, and if you truly want to maximize the return from your eSourcing investments, you have to heed and implement everything they collectively mention - leverage spend, understand TCO, improve operations, develop mutually beneficial supplier relationships, and optimize. But I also believe you have to go beyond a supply driven and / or spend driven eSourcing process focused on cost to truly be a market leader and secure long term success.
Look at today’s market versus the market of, say, five years ago. We have global supply chains and an uncertain global economic landscape; increased potential for supply disruptions as a result of unstable geopolitical situations, increasing terrorism, worsening natural disasters, shortening product cycles, and overnight bankruptcies; limited supply in many commodity markets; skyrocketing energy costs; a maze of new regulations to comply with; and decreasing returns from monolithic enterprise IT investments. Although they may have each had a different emphasis, both supply management and spend management were designed to address the issues of supply risk and spiraling costs that are a result of the dynamic market conditions of today’s global market place, but risks and costs are still increasing exponentially for your average company.
The only way to fully address these risks is to optimize your supply chain and associated spend from a Total Value Management perspective. You still optimize your total cost of ownership, but you balance that cost against the supply risk and potential losses each decision entails. For example, overseas single sourcing from a Chinese supplier might be your overall lowest total cost of ownership, but when you combine the regional instability from both a political and workforce perspective with all of the disruptions that could occur between the supplier’s factory and the docks, the overseas ports, the ocean freight network, your American port(s) of choice, and your local distribution centers with the supply risks your supplier has, the potential for minor supply disruptions is high, and if you run just-in-time inventories on commodities with unpredictable demands, the potential losses from even a minor disruption could cancel out by many factors the savings you thought you gained from your TCO-focused sourcing strategy.
That’s why Iasta has adopted a Total Value Management framework for eSourcing and is in the process of revolutionizing its SmartSource suite to build on associated best-practices. As I mentioned in my last blog entry, you need “the right products at the right time at the right price - every time - guaranteed. This requires an equal focus on spend management, to control costs and improve operations, and supply management, to mitigate risks and ensure supply.” A focus that is soundly based in Total Value Management, the logical evolution of Total Cost of Ownership, and the next generation of eSourcing.
You heard it here first, and we will continually focus on this concept of best practices in eSourcing.
In a recent issue of Supply Chain Management: An International Journal, the author states in his article on “Executive decision-making traps and B2B online reverse auctions” that a recent study has demonstrated that the savings achieved using e-auctions is much less then that claimed by the companies that provide reverse auction services and that a common result is poor sourcing decisions, higher costs, and less cooperative supplier relationships. The author then claims that related studies have shown that the many benefits for buyers and sellers as claimed by the market makers are greatly overstated, if not false.
Now it is quite obvious that we at Iasta, along with just about every other major e-sourcing vendor, do not agree with these statements, but in fairness we will admit that a poorly implemented e-Auction, just like any poorly implemented sourcing or e-sourcing process, is not likely to produce good results.
So, how does one avoid a poorly implementing an e-Auction solution? The same way one would avoid poorly implementing any sourcing process – by following the basics and taking a total cost of ownership framework into account. Tracing back at least to Lisa M. Ellram’s (the Bebbling Professor of Business of the W.P. Carey School of Business at Arizona State University) seminal paper “A Framework for Total Cost of Ownership” in the International Journal of Logistics Management (Vol 4, No 2, pp 49-60) in 1993, the total cost of ownership concept should be a well understood and vital part of any serious sourcing process in today’s organizations.
What does this mean for an e-Auction process?
First, let’s review some of the fundamental TCO components. For every transaction, there are pre-transaction cost components, transaction cost components, and post-transaction cost components. Pre-transaction cost components relate to need identification, source qualification, and supplier education costs. Transaction components consist of price (per unit), order placement costs, delivery and transportation costs (and any associated tariffs and duties), billing or payment costs, inspection costs, return costs of defective items, and follow up costs. Post transaction components consist of incurred and utilization costs (such as storage and failure), customer goodwill and firm’s reputation, and any ongoing maintenance or repair costs.
This tells us the following:
(1) As with any good sourcing project, we should take the time to (pre)qualify our needs and sources. Including suppliers that can not meet our needs in the timeframes and at the quality levels we require can severely damage the auction – regardless of whether or not an inappropriate supplier wins a bid. If an inappropriate supplier wins you could miss targets or get stuck with inappropriate products, but, more importantly, even if the inappropriate supplier loses, you could be creating ill will and distrust among incumbent or more appropriate future suppliers by including them.
(2) Price per unit costs are not the only costs that need to be considered – you also need to take into account transportation and related costs (duties, tariffs, etc.) as well as any incurred costs.
Therefore, when you are conducting an e-Auction, you need to determine which transportation related and incurred costs differ between suppliers, on a per-unit basis, and add them to the supplier bids, or, in the case of transportation, allow the suppliers or 3PL vendors to bid on transportation costs.
(3) e-Auctions should be approached with the same level of care and seriousness that you would approach any other sourcing process, after all, goodwill and your reputation are on the line.
With respect to the claims that “the savings achieved using e-Auctions is much less then that claimed by the companies that provide reverse auction services” and that “the many benefits for buyers and sellers as claimed by the market makers are greatly overstated, if not false”, it should be clear that if you consider your total cost of ownership and undertake the e-Auction with the same level of seriousness and good faith that you would any other sourcing process, the savings and benefits you achieve will indeed be real. Iasta takes great pains to explain both the benefits and pitfalls of reverse auctions, as they are not panaceas for success, but rather, extremely useful tools when utilized in the proper environment and training.
In the latest issue of ISM’s magazine: Inside Supply Management, there is an article which reports on some findings by CAPS Research regarding e-procurement usage. Considering the title is - Procurement Use is High, it is a very well adopted solution. Some of the interesting findings include:
62% of the 195 respondents reported having and using an e-RFx system, of that number 64% use this technology in an SaaS model.
In larger companies (Fortune 500), 86% report using an e-RFx system.
58% of companies reported using reverse auctions for a total almost 14,000 auctions executed.
The median spend throughput on auctions was just under $40 million per year.
CAPS plans to keep the data up to date with regular refreshes which is great because it is important to get quality benchmarks on the usage and growing interest in e-Sourcing tools in both the installed and on-demand models.
In addition to this information, I also got an email last week from Aberdeen. They are conducting a survey about spend intelligence which may be of interest to many readers. You can take the survey yourself here.
Recently, I’ve been thinking quite a bit about the whole SaaS/On-Demand vs. installed argument in the middle market. And with Oracle / JD Edwards coming out with an e-sourcing offering, the question is now one that middle market procurement organizations should really think hard about as well.
Personally, I’m becoming more and more sold on SaaS as the optimal delivery model for e-sourcing when it comes to the middle market. Here’s three reasons why:
1) E-Sourcing is not just about software. The support (e.g., supplier training, event monitoring, bid strategy, etc.) is often just as valuable as the software itself, especially for organizations which are just getting started. By working with a single provider who hosts the software and provides these services on top, it simplifies the work required on the customer side, and should, in theory, accelerate and maximize savings. This is critical in the middle market where resources, staff and budgets are in short supply and organizations need to generate initial results rapidly to prove the value of their investment.
2) E-Sourcing software improves everyday. Well, not quite everyday, but with vendors offering new SaaS releases coming at least a few times per year (often more than that), customers often gain new functionality at a small or no incremental cost (such as bid optimization). If you license a product, you’re stuck with the current capabilities unless you upgrade. The fact that middle market companies now have the same — or similar — advanced e-sourcing optimization capability on their desktop that Fortune 500 companies have paid millions for is due entirely to the SaaS free-upgrade approach.
3) Avoiding the IT hassle and heartache. In middle market companies, IT organizations (if you can call them that) are stretched incredibly thin. The last thing they want or need is to support another business application. And what matters more to them when the sh*t really hits the fan? Getting the accounting system back up and running so the CFO / controller can close the books, or helping out the procurement organizations. Go figure. Purchasing is not the one who signs the paychecks.
I’m willing to be convinced that SaaS is not the answer in the middle market, but the more I think about it, the more I feel that with very few exceptions, hosted e-sourcing is the way to go. Still, the recent Oracle / JD Edwards announcement has at least raised the question – and option – of a non-SaaS approach. And options are good things. At the least, they provide fodder to negotiate better deals with SaaS providers!
As mentioned on E-Sourcing Forum last week, SAP has made the leap into the sourcing game. Jason Busch offers some insight into the deal and how it will impact SAP and the market overall. Of course, this will be something of a topic here and I am sure I will come up with some of my own thoughts in regards to the merger.
None of this is surprising, SAP has been agonizingly slow to react to this market in North America and integrating the Frictionless application is at least an 18 month project. I mentioned multiple times in the past weeks that Frictionless was on the ropes and that absence from ISM was a telling sign that the company was no longer going to exist autonomously.
Everyone is aware of the continuous price increases for crude oil and gasoline but what I didn’t realize was that for the last 12 months natural gas has actually decreased just over 5%. I am sure a lot of this has to do with the fact that much of the US has had a very mild winter but still did not realize this trend since the spotlight has been on oil and gas.
This site NGSA.org has some interesting facts about the usage and production of natural gas. I found it surprising that almost 8,000 US companies produce natural gas and that 24% of the total energy used by Americans is natural gas.
With the rapidly rising oil and gasoline prices and somewhat stable natural gas prices, cities have jumping on the band wagon of ordering public buses that are run on natural gas and these orders are expected to represent 20% or more of all new bus orders.
Propane should also be put into this category since pricing generally has only risen 5% over the last 12 months and has actually decreased in price since October.
The index information was provided by www.propurchaser.com, a member-based website that has been quietly helping purchasers drive down costs for over 5 years. For more information and/or a free trial membership, click here.
By now, regular readers of e-procurement blogs will have noticed the “phrase-war” between Tim Minahan of Supply Excellence and Jason Busch of Spend Matters. A quick summary can be found in a recent blog entry from Procurement Central, Dave Stephens’ Blog.
In an attempt to qualify the “laugh factor”, Dave took an interesting approach and graphed the number of recent searches for “purchasing”, “procurement”, “supply management”, and “spend management” using Google Trends. The trends indicated that “supply management” is much more common then “spend management”, but nowhere near as common as “procurement” or “purchasing”, the leader.
But the buck doesn’t stop here. Just for the heck of it, I decided to take the opposite approach to determine the relative popularity of the terms. A Google search for “supply management” yields approximately 3,990,000 pages - not bad, but barely half of the number of pages yielded for “spend management”, which chimes in at roughly 7,530,000 pages at the time I ran my searches. Of course, neither competed with “procurement” at about 216,000,000 pages or “purchasing” at a whopping 374,000,000 million pages!
So which is it? Supply Management is the more popular search term but Spend Management appears to be in more common use, according to the considerable page count disparity.
I’m going to chime in and say both! Then I’m going to stir up the debate even more and say neither! And I’ll probably be correct in both counts.
Why? Well, let’s review the main points and counter points (and apologize in advance for dropping a lot of the context, but you can always refer back to the full posts on their blogs at your leisure).
Tim Minahan defines these terms as follows:
“Supply management is a strategic discipline focused on optimizing the TCO of external and global supply relationships.”
“Spend management is a marketing campaign (albeit a brilliant one) focused on improving internal operations and reducing spend.”
Jason counters that:
“Spend Management is something bigger. It’s about turning a function into a mindset. It’s about transforming business process into economics. And it’s about changing companies and business worldwide, not just purchasing.”
Tim responds that:
Supply Management is more “strategic” with its focus on “assuring supply and mitigating risks” and that “Spend Management’s myopic focus on reducing spend not only overlooks the vital importance (i.e., cost and value) of supplier performance, but it can also expose enterprises to undo risks.”
… and they are both right! But they both miss the point by (over) valuing one over the other. Both terms are relatively common. Both address key points in a supply chain strategy. But neither gives you the whole picture.
Strategic (e-)Sourcing isn’t about supply, or spend - it’s about value. Good strategic (e-)Sourcing focuses on Total Value Management - the right products at the right time at the right price - every time - guaranteed. This requires an equal focus on spend management, to control costs and improve operations, and supply management, to mitigate risks and ensure supply. Both have an important role to play - they are two sides of the same coin - the TVM coin.
That’s my 3 cents. Time to put on my welding goggles and step back.
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