Archive for August, 2006
August 31st, 2006
David Bush - Iasta
Freight impacts a tremendous amount of sourcing decisions and coming in 2007 a new EPA requirement will be adding to the complexity and certainly the cost structure. Beginning June 1st, the EPA mandated that all diesel fuel meet the new low emission standards, and although some extensions have been granted, the process will be completed. There are many interesting facts about the industry available at Facts on Fuel (which is sponsored by the American Oil and Natural Gas Industry). As mentioned, assembly lines will start producing truck engines under the second part of the clean air initiative which will trap additional particulates but at a cost of $5000-$8000 per truck.
What is definitely good for the environment will be felt by all of the supply chain and consumers. The basics of rising freight costs are:
- Higher fuel costs
- Higher production costs of new engines
- Less efficient fuels and higher maintenance costs on engines
The expected impact of these changes will result in higher prices in multiple layers of the cost breakdown. This is certainly good news for the air we breathe, but sourcing professionals need to be aware of all the factors that will cause price increases with freight escalators. In addition, having e-Sourcing tools that optimize the supply chain allocation will become even more important as buyers weigh decisions of vendor supplied freight vs 3PL vs using their own resources to each delivery location. With these new requirements, you may be interested to collect additional details in your eRFx from the freight suppliers as to who is following these EPA requirements and how that will impact your business. As always, RFx documents will need to account for freight/fuel escalators but analysts can pin down the locked costs by building accurate scenarios through advanced sourcing optimization.
Look for a good article in September on the issue from Supply Chain Brain.
Entry Filed under: General, Global Supply Issues/Risk, Optimization, Suppliers, e-RFx
August 30th, 2006
David Bush - Iasta
Today marks the One Year Anniversary of E-Sourcing Forum. Things have definitely changed since that launch when we had a handful of people peeking in every day. In a few short months, we were able to build the content value to a point where thousands of people each month come to this blog for repetitive knowledge gain and information or from highly specific search engine results.
Also in this time, blogging for supply management sake has become quite en vogue with a nice group of very valuable sites popping up in 2006. Of course, I am proud of the fact that one of the smaller companies in this industry was the unquestioned leader in launching a corporate sponsored blog dedicated to e-Sourcing and Supply Management. It can be argued that Ariba had a hand in helping to launch Spend Matters, but as Jason has very intensely defended that he has neither a master nor an agenda.
From our humble beginnings, ESF has expanded into deep dives on very strategic topics such as software adoption issues, the value of SaaS, functionality discussions, and the current state of highly volatile industry. In this time, we have lost a few vendors along the path and will surely lose a few more soon. All the while, Iasta has continued to build very robust supply management functionality with 10% of the average development teams of our peers.
The market has come to expect innovative things from Iasta and we will not disappoint. Look for more creative functionality in SmartSource and more interactive ways for purchasing teams to build knowledge and talent from Iasta’s efforts. 365 days ago, I could have never predicted the expansion of this “project” and everything that has been published as a result. I have personally met a huge number of people that I greatly respect and built relationships for Iasta that have been immensely helpful. I can only imagine what will result from Year 2 of this very simple idea that carries very real benefits to so many people.
Many thanks go to people that have helped me increase the frequency and quality of the content such as Jason Busch, Michael Lamoureux, Jason Treida, Sean Delaney and Agatha Degasperi.
Entry Filed under: General, e-Sourcing Marketplace
August 29th, 2006
David Bush - Iasta
When Michael mentioned to me his idea of summarizing thoughts from a group of bloggers (in the form of a virtual round table discussion), I instantly thought about trying to actually think this through and come up with something interesting - all while trying to close on a house and move my family! Having brought together a great group of thought leaders already, I buckled to the peer pressure and decided to throw in some ideas of my own. One thing that can be said easily is that the Sourcing technology industry is moving so quickly that no one will end up having a correct answer. The closest we can come, is to merge together a group of ideas to paint a very fuzzy picture, so..full steam ahead!
As I looked into the other people that were participating - Dave from Oracle with deep market knowledge at the largest companies, Tim with access to every CPO in the world, Jason as the new world leader of online media in sourcing, and Doug who actually is working in sourcing, it seemed to me that just creating my own forecast of the future would be somewhat redundant, and maybe even less credible. My contrarian view is more from what I have seen already - since 2000.
In 2002, the craze was about reverse auctions. All the buying teams wanted to know how to run them and what could be saved on what items/services. In 2004, the new item du jour became e-RFx and companies wanted to build in sourcing automation and process to the strategic bidding cycle. Now in 2006, sourcing optimization has become hot territory as companies realize that complex modeling can be done by the common man. Michael even had a very good deep dive on this topic here on E-Sourcing Forum last weekend. Obviously, Iasta believes the future of sourcing lies in the optimization functionality, but this is only half the story and is only looking at how technology will change and adapt.
My belief of the future is also forged by process improvement and enhanced corporate understanding of how to use technology. There are fantastic platforms available now that did not exist 10 years ago. These have helped companies save billions of dollars just by sheer brute force of better tools that buyers did not previously have. However, could you review your spend with an Access database instead of a fancy spend analysis tool? Could you negotiate pricing with Excel and Word over email? Yes, of course you could, and many companies that have Supply Management technology still have people that do this. This is why I believe the immediate future lies in companies understanding how to pull all these tools together to be used effectively. Again, my opinions lie not from interviewing leaders at individual companies, but from seeing how Supply Management gets used in the real world from over 100 clients. Some use it really well, some do not. All have room to learn and get better. I am definitely on the ground level with the Infantry, not in the Generals war room, so my thoughts are more refined to the usage today and tomorrow over what will be the convergence of many loosely tied factors.
Another factor to consider, especially from the technology side - its not done. Software is a living, breathing entity, that changes daily. Once a tool is brought into the process, you will have some functionality that will help immediately but there is a maturation process that vendors and customers alike are going through to find the best fit and features. This is a very fluid process and every release of an application will address more issues but they will never be complete. The software can help any organization with weak areas but this always should be supplemented with personnel improvements and new innovative ideas.
How do you bring it all together? This is the $64,000 question and there are many strategies that are needed which include having a strong vendor that can help build the momentum and execute the plan. Executive endorsement, buyer performance review based on technology adoption, savings goals and tool visibility, extensive and repetitive training, and deep understanding of the proper application of each tool are just the foundation. Previously, I have written about this topic here, and here, and I will continue to do so, as it is very important. In fact, it is such a valuable discussion point, that Iasta and yours truly, will be leading workshops on the topic.
In all honesty, this is a very difficult blog to write. I feel as though I could go in 10 different directions and all have some merit. To give this topic justice, it would need to be 50 page white paper for starters and then be bolted onto every month. Hmmm…
Entry Filed under: General, Interviews, Technology, e-Sourcing Marketplace
August 28th, 2006
Michael Lamoureux
When choosing an optimization solution, you generally have two choices: a Platform Optimization Engine that is integrated into a strategic sourcing suite (such as Iasta’s Bid Optimization 1.0 that runs on top of industry standard solvers such as Ilog’s CPlex) or a standalone Best of Breed product (such as CombineNet’s customized optimization platforms based on their proprietary solution algorithms customized for certain problem domains and models). The question is - which is best for you?
As you probably have guessed, it turns out there is no easy answer to this question. It really depends on the problem you need to solve, the complexity of the model or modeling capabilities you need to solve it, the size of the problem, and the effectiveness of generic optimization approaches such as linear programming, mixed integer (linear) programming, and constraint-based programming on your problem. It also depends on what you are looking for in a solution - do you want ease of use or flexibility, low cost or (potentially) high value, off-the-shelf or customized, etc?
Generally speaking, POE is an easy-going, relatively inexpensive date while BoB is a serious, expensive commitment. However, whereas POE is only comfortable in familiar situations, BoB can adapt rather well to new situations with very little effort. POE is often backed up by an extensive support group whereas BoB is a relative loner, with only a small group of close friends there to support him.
In other words, since POE is part of a package deal, the relative cost for POE’s services is usually much (much) less than the cost of BoB’s services. However, POE can generally only solve the problems that fit into the pre-defined set of models that POE comes with. In contrast, BoB can often adapt to handle new models and new variations thereof as time goes on. Since POE makes use of the services provided by third party optimization engines, POE gets better not only when the platform improves, but also when the third party services improve. On the other hand, BoB only gets better when the provider supporting BoB gets better. Since POE is generally designed to solve a small range of problems, POE’s user interface is usually customized to the problems in such a way as to make their definition easy and obvious to even the most inexperienced of analysts. On the other side of the fence, BoB, designed to handle a wide range of complex problems, is often quite difficult to use and often requires a lot of education and experience if you want optimal results.
So where do you start? I’d recommend listening to the advice of POP, Practiced Optimization Practicioner who knows that the majority of your optimization problems in a particular area (generally between 60% and 80%) can usually be approximated very well and solved near-optimally by POE and that POE is an easier, quicker, cheaper entry point into optimization than often anti-social BoB. Therefore, you should start with POE on the problems that POE is most suited for, get comfortable with optimization, and get some quick hits. Once you understand optimization, you can then dive in on your more complex problems and determine whether or not you can use POE, the kind of results you can expect, and whether or not you should bring in heavy hitting BoB to tackle those problems POE can not handle, or may not do well on.
In the future, I think you’ll see the market leaders using both solutions - POE for most of their day-to-day sourcing problems, but BoB for complicated make-or-buy, logistics heavy, or non-standard sourcing-allocation problems where large amounts of savings are there for the taking. (Large being the key decision factor on whether or not you engage BoB, since BoB can easily be 10 times as expensive as POE and you need to approach everything from a value-based ROI perspective.) This means that companies like Iasta (POE) and CombineNet (BoB) should both have a very bright future, since I predict that Iasta’s forthcoming Decision Optimization 2.0 offering will be best-of-breed in its category (on-demand integrated strategic sourcing optimization) and CombineNet is already best-of-breed in many ways in its category (stand-alone logistics, multi-variate make-buy decisions, and non-standard complex-sourcing).
For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the Strategic Sourcing Decision Optimization: The Inefficiency Eliminator wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Optimization, Technology
August 27th, 2006
Michael Lamoureux
Friday we noted the effectiveness of decision optimization and how it can enable early adopters to identify average incremental savings of 12% above those that basic, price-focused auctions alone have generated, according to Aberdeen’s recent “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” in June of 2005. Yesterday we discussed the factors that combined to downplay decision optimization’s importance to a successful e-Sourcing process. Today we will discuss how the market is changing and why decision optimization will soon take its rightful place at the heart of strategic sourcing initiatives.
Four major factors are currently combining to elevate the importance of decision optimization to strategic sourcing. Briefly they are:
- Extensive use of e-Auctions over the last 3-5 years by early adopters.
- Optimization Technology has evolved.
- Solution Providers are integrating optimization into their platforms.
- Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.
(1) Extensive use of e-Auctions over the last 3-5 years by early adopters and market leaders have sucked all of the fat out of supplier margins, rationalized the supply base, and streamlined the process to the point where there is essentially no more money to be saved on auctions alone.
(2) Optimization technology, like all technologies undergoing an evolution, has become more accessible and easier to use. No longer does it take a heavily trained PhD to use today’s optimization products. A BSc with minimal training can be up and running with today’s tools in a few hours, and comfortable within a few days. (However, it still takes a PhD, or PhD team, to build the product, but that’s why market leaders are hiring very well educated and experienced teams.)
(3) Leading Solution Providers are recognizing that decision optimization needs to be an integrated part of an e-sourcing platform that supports the full range of e-sourcing activities and are incorporating these capabilities into their product suites.
(4) Leading Solution Providers are recognizing that a minimal amount of sophistication is required in the model and building this into their products. For example, whereas Iasta’s bid optimization 1.0 product contains the basic concept of Ship Tos by way of allocation groups, their forthcoming product, among other capabilities, will eventually support Ship Froms and discounts, which in turn support freight lanes and volume-based pricing.
I see a very bright future for decision optimization enabled e-sourcing platforms, both for solution providers and their clients who will now have the opportunity to maintain double digit savings in their sourcing events for years to come. But I’d like to know what you think. Who’s using it now, Who’s planning to use it, and Who’s not. And why?
For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the Strategic Sourcing Decision Optimization: The Inefficiency Eliminator wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Optimization, Technology
August 26th, 2006
Michael Lamoureux
Yesterday I pointed out a recent report from Aberdeen in June of last year entitled “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” where they determined that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify average incremental savings of 12% above those that basic, price-focused auctions alone have generated and discussed the fact that despite this result, optimization still is not used regularly across the board.
I also indicated that the lack of use of optimization across the board is likely the result of a number of factors that have historically combined to downplay the appeal of decision optimization, which has often been viewed as overly complicated unless absolutely necessary.
Specifically, I believe the lack of adoption of decision optimization across the board is the result of four key factors.
- Early e-Auctions generated amazing returns.
- Initial optimization offerings were hard to use and harder to understand.
(In my view, MindFlow fell into this category.)
- Many solution providers attempted to side-step the complexities by toning down their options.
- A lack of integrated solutions on the marketplace.
I will now discuss each of these in more detail.
(1) Early e-Auctions generated amazing returns!
Many auctions generated double-digit returns, often in excess of 20%! This caused auction technology to be over-hyped as a technology for cost savings. As a former employee of an early provider of Strategic Sourcing solutions, I saw both the results and the buzz it generated. However, these results cannot be maintained indefinitely! Even if a supplier has a bloated margin of 100%, the most they will be able to give up and maintain viability is typically in the 60% - 80% range. In other words, after 3 events, there are no more margins to trim.
(2) Initial optimization offerings on the e-sourcing marketplace were hard to use and even harder to understand.
By its very nature, optimization, which is based in complex mathematics, is hard. Very hard. And many products had user interfaces to match. The underlying technology may be sophisticated, but this does not imply that the end product should be! Your car is a perfect example. Modern cars have very complex integrated mechanical, electrical, and electronic systems. But the user interface for an automatic is a gear shift (park, neutral, drive), a steering wheel, a gas pedal, and a brake. Decision Optimization should be the same – mind-boggling under the hood but easy as e-mail through the UI. Next generation systems will be. (I believe that this is one of the reasons that decision-optimization (only) companies like MindFlow never caught on beyond a few large CPG and Food Service companies. For example, even though there was a time when MindFlow could not be matched in terms of self-service optimization capability in the sourcing marketplace*, it was also true that it could cause the average user significant consternation. I believe that only sophisticated sourcing professionals with extensive training could take full advantage of the solution. *I’m sure a few individuals at CombineNet would disagree with this statement, but one thing I repeatedly heard from customers and prospects about their early solution offerings was that you needed one of their PhDs to run it for you. However, I should note that for certain areas, this is definately no longer the case with some of their recent releases.)
(3) Many solution providers attempted to side-step the complexities by initially toning down their offerings.
The proclaimed market leaders in the sourcing space provide us with examples. Whereas MindFlow built an extensive model (7+ logical dimensions) with ship-tos, ship-froms, built in lane support, complex cost structures, etc., some of the leaders went with simple point-based bid solutions. Bid 1 from Supplier 1 for Item X, Bid 2 from Supplier 2 for Item X, Bid 1 from Supplier 1 for Item Y, Bid 2 from Supplier 2 for Item Y, etc. with a couple of limit or allocation constraints. Although these products turned out to be much easier to use, they did not provide enough sophistication to model the real world supply chains and constraints of the companies that needed optimization the most! Interestingly enough, I believe that this is one of the reasons MindFlow lasted so long when many other optimization-based start-ups no longer exist (independently). MindFlow’s early market may have been small, but they were one of the pioneers of true decision optimization technologies and one of the few companies to offer the real power multinational CPG and food-service companies needed to accurately model their sourcing scenarios. (In comparison, CombineNet was one of the few companies that could handle their purely logistical models.)
(4) A lack of integrated solutions on the marketplace.
Many of the early providers of decision optimization only offered decision optimization. Furthermore, those companies that did offer other solutions typically weren’t best in class, especially from a usability perspective. However, leading sourcing professionals know that decision optimization is most effective when it is part of an integrated e-enabled strategic sourcing process and relatively ineffective on its own. (At least one of Iasta’s forthcoming solution briefs will elaborate more on this.) Decision optimization needs cost data (that results from auctions, possibly sealed bid), qualified award possibilities (that results from RFx and Supplier Scorecards), and an understanding of the supply chain strategy and appropriate commodity market (that results from spend analysis and proper processes). On its own, its capabilities are limited, integrated into an end-to-end e-sourcing platform, its capabilities are virtually endless.
Fortunately, market conditions are changing and I believe that the industry as a whole will not only be ready for this amazing technology very soon, but be hungry for it, especially when it is properly integrated into an e-Sourcing platform that provides best-of-breed technologies that support the end-to-end e-Sourcing process. The reasons I have for this forthcoming shift, and the reasons why some companies are working hard to build a best-of-breed decision optimization offering that is tightly integrated into an end-to-end e-Sourcing suite, will be illuminated in tomorrow’s post.
For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the Strategic Sourcing Decision Optimization: The Inefficiency Eliminator wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Optimization, Technology
August 25th, 2006
Michael Lamoureux
Even before Aberdeen came out with its “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” in June of last year, some of us already knew that decision optimization was the future of strategic sourcing. Moreover, the fact that they determined that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify an average incremental savings of 12% above those that basic, price-focused auctions alone have generated was no surprise to those of us who had been developing such technology, and monitoring its implementation success, for many years. That’s why innovative sourcing companies like Iasta (your e-Sourcing Forum blog sponsor) were already working on Bid Optimization capabilities (with version 1.0 released in December of last year) and focussed optimization companies like CombineNet have been pursuing improved optimization technologies and algorithms for over a decade.
And as you read this, I can tell you that Iasta is investing heavily in the research and development of Decision Optimization 2.0, which it expects to complete by the end of the year. Decision Optimization 2.0 will be based on the theory of Total Value Management (TVM) and continue to run on market leading solvers such as ILog’s CPlex. TVM models attempt to go beyond the capabilities of LCO (Landed Cost Optimization) and TCO (Total Cost Optimization) models by capturing the value, and not just the cost, of an award. They support qualitative constraints, to allow you to ensure the award will meet your physical constraints (durability, reliability, timeliness, low defect rate, etc.), and allow you to capture the impact costs associated with an award (such as marketing value, low return rates and high customer satisfaction, etc.) through constraints, fixed costs, and adjustments. TVM is the next logical progression in sourcing cost modeling (and an extension of the TCO modeling capabilities that were found in many previous generation modeling tools, which included MindFlow). But I digress.
Many innovative service and solution companies in the e-sourcing marketplace have been betting for the last five years (or so) that optimization is the wave of the future, but the vast majority have met with limited success (often surviving by M&A, like MindFlow, as pointed out by David in a post earlier this year) and many more are out of business.
Furthermore, the companies that have succeeded, have done so primarily due to acquisitions and other strengths. For example, Ariba acquired many of its customers from Free Markets and its customers praise them for their market knowledge and end to end platform capabilities that support integrated best practice processes from start to finish. Emptoris essentially doubled its customer base from the Dicarta merger, acquired many of its initial customers from its auction capabilities, and retained them through its own end to end platform, beefed up by many acquisitions over the years. i2 just isn’t a name I regularly hear in any sentence that contains “strategic sourcing” and “decision optimization”, and many companies that have survived, like SCA Technologies, are still relatively small in terms of customer base.
MindFlow, once acknowledged by the analyst and research groups, including AMR and Aberdeen Group, as the provider with the most comprehensive self-service platform for decision optimization, especially for CPG and Food Service, with its complex modeling capabilities and numerous constraint categories, is now virtually non-existent since the acquisition. In fact, when you get right down to it, the only company that has been around for the long haul and succeeded on optimization alone is CombineNet, and it has historically made most of its inroads in logistics and transportation, not strategic sourcing award allocation (although its customer base and focus is broadening). In fact, in a recent web search, the only recent news of significant note for 2006 that I could find in the strategic sourcing optimization arena, is the announcement in January that CombineNet is partnering in a joint venture with the University of Pittsburgh Medical Center to provide advanced sourcing solutions to the healthcare industry, as per this press release.
It is well known that many of the market leaders, and many of the big companies, are using decision optimization as (a critical) part of their strategic sourcing processes, but, considering that leaders typically make up less then 20% of the market (and that I know for a fact that not all market leaders are using decision optimization), it’s fair to ask “Who else is using decision optimization?”.
More importantly, when research has shown that repeated auctions on the same category quickly lead to diminishing returns, and often to net 0 returns after only 3 or 4 auctions, and that decision optimization often leads to incremental savings of 12% above and beyond other savings opportunities, why aren’t more companies, especially the mid-market enterprises, making regular, constructive use of this technology?
I believe the lack of use of optimization across the board is the result of numerous factors that have combined to downplay the appeal and importance of this technology over the last few years when concentrated efforts should have been made to introduce this technology as an overall component of any value-based strategic sourcing process. Tomorrow, I will discuss those factors and Sunday I will discuss why I think the time of decision optimization for sourcing analytics is finally here.
For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the Strategic Sourcing Decision Optimization: The Inefficiency Eliminator wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, Optimization, Technology
August 24th, 2006
David Bush - Iasta
On a hot summer day, there’s nothing the average guy wants more than a cold beer. However, if you happen to work at a brewery, there’s a lot more to buying beer than just buying barley, hops, and yeast, especially if you are a specialty brewer brewing specialty beers. I guess that’s why I found the recent article Brewer keeps his buying simple in Purchasing Magazine so enticing (or maybe it was just the fact it was a hot day and I wanted a cold beer … who knows for sure?).
The article describes how Mass Bay Brewing Co. needs to buy enough raw materials, bottles, carriers, cases and kegs to get almost 3.1 million gallons of malted alcoholic beverages into a 23-state area east of the Mississippi, in addition to ingredients and packaging for a new soft drink product line. More specifically, Mass Bay Brewing Co. needs to buy 5.5 million lbs of 10 different kinds of malts, 65,000 lbs of six types of hops, various fruit flavoring and spices, and up to five weekly truckloads of 2,800 cases of bottles.
However, as this article points out, the buying process does not have to be complex. Using open RFQs, eTools, and a consistent preferred supplier base can keep the process simple. Considering that choice raw materials and careful brewing performance is required to produce a quality product that meets the “standards for beer”, using known suppliers who consistently provide quality materials is often more important than price.
On a personal note, I had the worst 12 hour span of my life, in Boston -1996, specifically because of Harpoon IPA. Fortunately, I “recovered” just in time for the wedding reception to begin and start the whole process over again. I might need to see if Mass Bay Brewing had any sort of quality disruption because the only other possible cause would be related to excessive quantity. That beer is seriously good, be careful!
Entry Filed under: Functionality, General, Global Supply Issues/Risk, e-RFx
August 23rd, 2006
David Bush - Iasta
I found the recent article in Global Logistics & Supply Chain Strategies of SupplyChainBrain.com entitled Looking Backward: Sony Ericsson Takes on Challenge of Reverse Logistics to be very interesting. The author, Robert J. Bowman, describes how Sony Corporation and Ericsson AB sought a competitive edge in the mobile-phone market by revamping the handling of returns and repairs.
The article described how Sony Ericsson required a fast, reliable and flexible system to manage parts for phones with a lifecycle of around nine months that would also lower its overall cost structure. It used to rely on a single electronics manufacturing service provider to handle productions, repairs, and logistics, but since the provider was subcontracting freight and brokerage and insisted on doing repairs in Mexico, the relationship wasn’t working.
Sony Ericsson decided to separate repair and logistics into two separate contracts, the first going to Bloomington PTS Electronics Corporation and the second to UPS Supply Chain Solutions. It was a challenge as this required building a system that could handle the sheer volume of product that would work through the system in a real time exchange between all parties involved and required them to absorb UPS Supply Chain Solutions’ knowledge, but it paid off. The company was able to reduce costs and double customer satisfaction levels, an impressive feat.
The article demonstrates that supply chain improvements extend beyond sourcing and distribution and that you should always be on the lookout for new ways to improve your operations.
Entry Filed under: General, Global Supply Issues/Risk, Supplier Performance
August 22nd, 2006
David Bush - Iasta
It only took a year but we have a valuation on ESF - $16,371.66! Of course, I have no idea the black magic being used to cook up this value and since no real person is signing checks for blogs, it is really worth $0. No matter, ESF is as much for sale as my dog. Why would I want to sell something that takes so much work and consumes my free time?? I also have the feeling that this value is really a series of metrics that are monitoring global visitor traffic, search engine links and comments as opposed to real revenue. ESF has no revenue, unlike Spend Matters that has significant sponsorship. That being said, I am very happy that we seem to have the #2 highest value!
Thanks to my friend, Doug Hudgeon, for finding this fun little application. As a point of reference, heavy traffic - politically charged blogs are worth a tad more:
counterterrorismblog.org, is worth $802,211.34
buzzmachine.com, is worth $1,618,536.18
Entry Filed under: General
August 22nd, 2006
David Bush - Iasta
There have been some very interesting posts-comments-responses regarding an original article blogged by Tim Minahan. Instead of trying to jump in and add to the thread, I think it is all very well summarized by Michael Lamoureux at his personal Sourcing Innovation blog.
I find the discussion very interesting as it touches on a number of hot button topics in e-Sourcing such as the usage of the term “reverse auction”, what e-Sourcing is and is not, perceived buyer laziness, visibility into poor work or process, supplier resistance and many others. Many years ago, we took the hot potato term “reverse auction” out of the supplier side of the software and replaced it with ‘Event’ and ‘Project’ because so many sourcing teams were hypersensitive to the supplier perception. If a sourcing project looks like a duck, swims like a duck and quacks like a duck - then it must be a…anything but a reverse auction! This is actually a very reasonable request for the software but can be amusing how it does not ever pass the Duck Test.
It is worth the time to navigate through all the links to get a good picture of all the differing opinions and valid counter-arguments.
Entry Filed under: Functionality, General, Reverse Auctions, Supply Management Best Practices, Technology, e-Sourcing Marketplace
August 21st, 2006
David Bush - Iasta
In the recent issue of APICS magazine (not available online yet), there is an article titled Spend Right, which goes into detail about spend management and tools that can help. The article also does a nice job of explaining that the tools merely help the people do their jobs more effectively. Andy Bartels, of Forrester, is also quoted and makes an effort to describe spend management by component:
- Spend Analysis: get visibility into the corporate spend
- Supplier Assessment: determination of who is being used and who should be used
- Sourcing: start the competitive bidding process
- Manage contracts: secure compliance with negotiated paper
- Order fulfillment
- Invoices: verification and payment
Among other interesting quotes: “Business leaders are starting to consider spend management a core business process that needs to be optimized across the company.”
Overall, it is a very good article which describes the equal importance of having a good set of tools along with a solid strategy for usage within the company. Examples from real users, such as Diebold and Kennametal, offer effective advice from implemented tools like Ariba and Ketera, respectively.
Entry Filed under: Functionality, General, Technology, e-Sourcing Marketplace
August 20th, 2006
Michael Lamoureux
Established Procurement Service Providers focused on sourcing are usually market leaders that have a number of inherent advantages which include a larger supply base, higher levels of expertise in niche categories, and the ability to aggregate spend on a larger scale. In addition, they can often tap more economical labor sources in regional markets and implement new sourcing processes and technologies more efficiently.
A PSP reduces the headcount you need to perform certain manual and tactical processes or to manage certain indirect or non-strategic categories that are not a core competence, freeing up your purchasing team to spend a much greater percentage of their time on strategic activities and strategic categories and generate a larger return on your investment in them.
What should you do to prepare?
Managed properly, a relationship with a PSP is very beneficial. However, before you enter into such a relationship, you need to prepare for success.
The very first thing you need to do, even before you make the decision on whether or not to outsource part of your procurement function, is to gather data on the current state of your procurement practice. Do a spend analysis by category and location to determine high-volume vs. low-volume categories. Work with product development to determine strategic vs. non-strategic commodities. Understand your transaction volumes and associated processing times. Document your processes and average sourcing times by category. Determine what currently falls under procurement, what does not, and what should.
The next step is to analyze this data and determine direct and indirect savings opportunities by outsourcing low-volume or non-strategic categories, transaction management, and process execution. Procurement outsourcing only makes sense if considerable year-on-year savings opportunities exist, especially since the greatest savings will not be realized until a year or two into the relationship. Furthermore, a good relationship is driven by a Service Level Agreement (SLA) that specifies mutually agreed upon targets and goals, and incentives for the PSP exceeding those targets goals, and reasonable values for those targets and goals cannot be set unless you have a basic understanding of your current spend and internal performance.
Once you have finished your analysis, you need to decide what will actually be outsourced, what the scope of the arrangement will be, how the responsibilities will be split, and how the relationship will be managed. A governance council will need to be established to maintain control over what is being outsourced and monitor performance and compliance. The council will be key to aligning stakeholders and insuring a single cohesive message is always delivered to the PSP.
A single senior executive needs to take responsibility, coordinate the deal to the point of closure, and oversee the initial implementation. The executive is also responsible for making your employees aware of the plans, overseeing the creation of the transition approach and timing, and explaining the benefits to the procurement function and the organization as a whole.
What should be in the SLA you mentioned?
One of the keys to success, the SLA must define a formal governance and oversight structure, risk-and-gain sharing policies, staffing parameters, operating specifics, and response times. It should be based on key metrics, and measurements against these metrics should be taken and communicated regularly. It should include incentives for exceeding targets and penalties for sub-par performance. It must allow for bilateral transfer of methods, processes, and knowledge and encourage continuous process improvement.
And in conclusion?
Once the SLA is nailed down, the specifics of the relationship need to be addressed. It should be a multi-year agreement, I would recommend at least two or three, with proper incentives, a well defined governance model, appropriate categories and risk management processes, and methodologies for the transfer of best practices. It should also identify and account for any important or relevant legal issues up front to prevent issues down the road.
Remember that the most significant benefits often do not materialize until the second or third year of the relationship, when it has matured to a smooth, natural process and that it takes time to collect enough data to not only measure performance and results, but improvement.
Make sure to not only link the agreement to explicit benefit targets, and continuous, step-change performance improvements, but to include rewards if the service provider exceeds those targets. Incentives drive everyone, partners included.
Then, when the contract is in place, measure performance regularly, insure issues are escalated when appropriate, and confirm that spend visibility is available to your users. Transfer best practices on a regular basis and work together for continuous improvement.
The measurements should include, but not be limited to, Savings Targets, Process Compliance, Supplier Compliance, Supply Base Consolidation, On Time Delivery, Transaction Accuracy, (PSP) Staff Retention, and Quality of Service.
For more information on procurement outsourcing, see the Procurement Outsourcing: A Brief Introduction wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, e-Sourcing Marketplace
August 19th, 2006
Michael Lamoureux
The Procurement Service Provider (PSP) landscape can be confusing, with a host of providers coming from many different backgrounds. You have traditional business process outsourcing and IT outsourcing behemoths that have invested in procurement skills, recent startups with procurement outsourcing as their sole vision, and specialist firms that concentrate on a handful of related spend categories. The result is a cloudy map of skills and capabilities ranging from transaction focused providers specializing in automation, through category specialists to comprehensive procurement service providers.
Considering that value comes from selecting the right partner with the right skill set, expertise, and experience to match your needs, it is very important that you can properly evaluate your options and choose the provider that is right for you!
So how do you identify a good PSP?
A good PSP will have access to the latest web-based e-tools, use a center-led procurement model, be driven by operating metrics, and have tools and processes in place to closely monitor compliance. It will also have a significant number of sourcing and category experts on staff who are up to date on best practices, experienced in your industry sector(s), and engaged in regular training and knowledge sharing endeavors designed to ensure they maintain world-class status. It will be based in a robust purchasing facility with integrated process and co-located teams, already have a pre-existing supplier network and supplier intelligence in your categories, extensive change management and knowledge transfer capabilities, and the flexibility to change as your corporate goals change.
Furthermore, the PSP will have a number of referenceable long-term customer relationships where they have been providing comprehensive spend management services across a significant number of companies and categories with a track record of success across industries, a solid balance sheet, a growth plan, and a commitment to maintaining operational excellence in procurement. Procurement will be its primary, if not only, focus.
What should you outsource?
Procurement outsourcing normally generates the largest returns when applied to non-strategic indirect categories and direct commodities of limited strategic value. In addition, it generates the largest return when the PSP has enough volume to identify significant savings opportunities. Therefore, you need to select a PSP that will allow you to go beyond simply infrastructure transfer and process support. (However, you should remember caution and not to go too far with your outsourcing initiative, since strategic sourcing dictates that you manage strategic categories carefully.)
Indirect purchases are ideal for procurement outsourcing because they are typically transaction driven, not part of your core business, and so varied that they generate considerable process inefficiencies for your staff, especially when most of your information systems will be designed for your direct categories. Furthermore, due to the sheer number of categories and variations therein, most of your buyers will lack the time and means to apply best practices such as cost breakdowns and benchmarking to these categories. Thus, a PSP with the right skill sets could be invaluable.
For more information on procurement outsourcing, see the Procurement Outsourcing: A Brief Introduction wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, e-Sourcing Marketplace
August 18th, 2006
Michael Lamoureux
Simply put, procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party.
Why should you consider procurement outsourcing?
It is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably then those who do not. When done right, this is especially true for procurement as it can generate additional value through sourcing and compliance savings as compared to the savings opportunities from most outsourcing arrangements, which are generally limited to efficiency improvements and headcount reductions. In addition, it is a transformational type of outsourcing where a portion of the savings generated from an initial endeavor can be used to finance and expand the transformation.
One reason to outsource would be if the procurement of certain categories, such as indirect or non-critical materials, or the management of certain procurement processes, such as requisitioning and compliance tracking, were not core competencies since outsourcing provides an opportunity to increase efficiency, lower costs, and increase savings. Outsourcing in these situations is often much more economical than trying to build the competence internally.
Another reason to outsource is to keep your top performers happy. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.
A final reason to outsource would be if procurement is an area that, if managed properly, could drive significant value to your business but it is not an area you plan on investing significantly in or increasing focus internally. In this case, you could consider full spend management outsourcing, but it is not something we would recommend unless you were in an industry where all goods and services procured on a regular basis were non-strategic indirect or commodities. A hotel chain would be one example of a firm where full spend management outsourcing might make sense as the vast majority of goods and services procured on a regular basis are commodities.
How does procurement outsourcing work?
There are essentially three basic levels to the outsourcing of procurement functions: infrastructure transfer, tactical process transfer, and strategic category transfer.
At a basic level, you are moving or augmenting staff, technology, systems, and supplier management to or with the PSP. At the next level, you are moving certain processes, such as requisitioning or procure-to-pay, that are easily automated and tactically oriented. At the highest level, you are transferring responsibility for entire categories and expecting the PSP to undertake strategic sourcing initiatives with respect to those categories.
At a basic level, the PSP will manage e-Procurement systems that automate and streamline manual purchasing processes and transactions and provide you with improved spend visibility, compliance, and process efficiencies. At a higher level, where you transfer tactical processes and control of indirect or commodity categories, the PSP will support day-to-day activities in supplier management, order and pricing compliance management, and policy enforcement and provide you with improved services levels and reduced costs. At the highest level, where you transfer strategic categories or full spend management, the PSP will provide on-going end-to-end strategic management of these categories, implement strategic sourcing best-practices, and drive continuous process improvements that should eventually lead to significant cost savings, or cost avoidance if raw material prices are steadily increasing in your commodity categories.
What results can you expect to see?
The value associated with procurement outsourcing is extensive. In addition to the year-on-year cost savings documented by numerous studies, obtained by way of the PSPs in-depth market knowledge and volume aggregation capability, you maximize your return on your existing procurement capability by freeing up your professionals to focus on your most strategic categories. You reduce cycle times and increase the capabilities available to your users, but, most importantly, you provide your users with total indirect spend visibility as a PSP will be able to benchmark practices and prices and apply a standardized process to each category it manages.
In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.
Aberdeen also found that 43% of enterprises already outsourced select procurement processes or spend categories and that an additional 15% planned to outsource procurement functions by 2007.
For more information on procurement outsourcing, see the Procurement Outsourcing: A Brief Introduction wiki-paper over on the e-Sourcing Wiki.
Entry Filed under: General, e-Sourcing Marketplace
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