Archive for January, 2008
January 31st, 2008
Sean Delaney - Iasta UK
In a previous entry I talked about how the utilisation of Spend Analysis software makes the rational of a vendor reduction programme less relevant. When reading the latest report from The World Economic Forum on the risks for 2008 I am convinced this logic will now start to gain more momentum.
According to the WEF there are 4 major risks to be aware of over the forthcoming decade. What is most disturbing is that all 4 will have an immediate effect on sourcing decisions.
In summary these are:
• Systematic Financial risk – this has already been well documented in recent weeks. The lack of liquidity in markets will have a negative effect on business investment and therefore increase capacity constraints in the global supply chain.
• Food Security – Global food prices are at record highs whilst stocks are at 25 year lows….”population growth, lifestyle changes, use of crops to manufacture bio fuels and climate change – are likely to sharpen over the coming decade”. There is already evidence of this in the UK. During the last 10 years land used for Agricultural purposes has fallen by 8%. In addition land still in use is increasingly being used for the production of Bio fuels. The price of wheat is at all time high. Furthermore during the same period the population has grown by 2m to 60m – this is predicted to grow to 69m by 2027!
As anicdotal evidence of the scale of the shift the other day I was at my son’s children party. When I was talking to one of the Dads he mentioned that an old colleague was, until recently trading currencies and he is now trading livestock in Australia…buying millions and millions of dollars of cattle one day and selling the next. What’s more is he is achieving higher returns than he was when he was trading currencies.
• Supply Chain Vulnerability – “Improvements in technology and global logistics, along with reduced trade barriers, have led to a historic expansion of international and intra-regional trade over the past 20 years”. Although this has widely been seen as a benefit the WEF are saying now our risks are too concentrated in core areas. For example the concentration of raw material ownership in the hands of say State controlled funds or the impact on wage price increases in China.
• Energy – the increasing demand for energy coupled with the requirement to reduce CO2 emissions is going to cause difficulties. I am already seeing the growth in the demand for specialist energy buyers to mitigate organisational risk. However when we see 17% increase in fuel bills universally applied by all suppliers, clear evidence of collusion in the market and what is worse more political influence on the supply it seems that such a move is now punitive.
I would like to add a fifth risk that since none of these risks were mentioned in the same report for 2007 volatility caused by globalisation should be added too!
From this it is quite clear that there is need for global supply chains to be more diverse and as mentioned before this can be achieved with decent (real time as possible) spend analysis. Furthermore this technology should be used to monitor production, commitments and deliveries. Reports should also include commitment further down the supply chain.
The use of sourcing optimisation technology is now essential and especially the use of “what if” scenarios is a must. In fact the speed of change could require optimisation scenarios to be computed more frequently and not just at the point of “award”. This would allow for the inclusion of such things like the effect of climate changes to raw material stocks or the increase in the average wage in China.
It is now obvious that it should be a priority to use both of these technologies. However what has struck me is that combining these technologies together would achieve far more powerful results. I don’t know the exact probabilities by my guess is that the benefits would be exponential and thus reduce the probability of major a catastrophe in a global supply chain.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Optimization, Spend Analysis, Technology
January 30th, 2008
David Bush - Iasta
In their winter edition, the CPO Agenda just published another article on everybody’s favorite person - the CPO. This one was called More Than Just The Goalkeeper.
But before I review it, I should note that a number of similar articles have been cropping up - exclaiming the importance of this individual - over the past few years. In the past six months alone, I’ve reviewed Profile of a Typical CPO that appeared in Supply & Demand Chain Executive in this post, Know Your Type that appeared over on SupplyManagement.com in this post, and Sourcing … The Profession that also appeared in Supply & Demand Chain Executive in this post. In addition, the doctor reviewed the CAPS publication Supply Leadership Changes in this post as well as authoring the post The Seven Savors of a Sourcing Sensei, summarizing some of the key points from the e-Sourcing Wiki paper on Sourcing Leadership over on Sourcing Innovation.
If we go back further, we’ll find many more posts on this topic, as well as many more articles, including the article Elevated to the C-suite in the winter edition of CPO Agenda in 2005. This begs the question, is there really any more to say?
The article states that to fully contribute to the organization’s strategic goals, CPOs need to be prepared to play out of position - to go beyond just being masters of procurement to being masters of corporate strategy and management where they function as an integral part of the executive management team. It also states that they need to break out of ingrained ways of thinking and create a new future for their organization as well as their function - one that is aligned with corporate strategy over a long-term horizon.
It also states that procurement professionals are at the heart of shaping and developing organization value, that they help to define the boundaries of the organization, that they directly influence operating costs, and manage key relationships with the outside world. Furthermore, they develop talent, embody organizational values, build commitment, enable constant communication, and make the important calls on big decisions.
In other words, nothing that we bloggers haven’t said before here on e-Sourcing Forum, over on Spend Matters, or over on Sourcing Innovation. However, even though there may not be that much more to say today than there was to say, three, six, or twelve months ago, if there’s anything new to say at all, it’s quite obvious that the basic message still needs to be repeated - as often as someone is willing to repeat it. After all, if we are still getting quotes from CEOs that say “most of the top team wouldn’t even consider that procurement could be part of the solution“, procurement still has a ways to go.
Entry Filed under: General, Supply Management Best Practices
January 29th, 2008
Michael Lamoureux
Purchasing B2B had a good article over the summer called Suppliers Like You Because? Discovering All Your Leverage Points by Terence Lillew that had a list of nine discussion points that should be considered in the development of a cost management strategy for a category.
1. Dollar Volume
Dollar volume is generally the primary leverage point. When a regular order over a period of time is locked in, suppliers can budget resources, plan appropriately and rein in their costs. Thus, you can insist that some of that savings is passed on to you.
2. Size
After dollar volume comes organization size. The larger the organization, and the greater the potential for future business, the greater the discount structure that the supplier can offer.
3. Leadership
The organization’s leader sets the tone for business value. If the leader is respected, and has demonstrated long-term effectiveness, the company can leverage itself into a better position.
4. Business Philosophy
A fair and ethical business philosophy that looks for solutions instead of attaching blame and that continually improves and a philosophy that supports creativity will give the organization a competitive edge in all negotiations.
5. Policies and Process
The company’s purchasing department must be responsible for the policies and processes if they are to leverage their position, and they must be sure to make sure the policies and processes are fair and up-to-date.
6. Early Influencer
A company known as an innovator gains a certain amount of prestige that can be leveraged to improve their position in a negotiation because they will be seen as a company you want to do business with.
7. Benchmarking
A leading organization constantly benchmarks its performance against peers and competitors. Suppliers know that a benchmarking company is often a successful company and may be more inclined to do business with such a company.
8. Buy Locally
Organization’s that buy locally have a natural advantage over those that don’t. A supplier wants to service a local buyer.
9. Payment Cycles
In an industry where most buyers are trying to extend payment cycles, any buyer that can reduce payment cycles is in a strong position to negotiate for additional discounts.
These are all great points. Be sure to think each and every one through before finalizing your negotiation strategy and starting an e-RFX or an e-Auction.
Entry Filed under: General, Supply Management Best Practices, e-Sourcing Marketplace
January 28th, 2008
David Bush - Iasta
There is an economic storm brewing and its called a recession. I believe Zig Ziglar once stated that experts have predicted 36 out of the last 2 recessions. The problem is, that nobody actually knows if we are in a recession until the economy is already pulling out of it. To start, I think it is important to understand some macroeconomic definitions:
Recession: a decline in any country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.
Stagflation: a period with out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually a recession.
Depression: “a recession is when you lose your job; a depression is when I lose mine.” - Newspaper columnist Sidney J. Harris
In all seriousness, we look to be in the middle of a legitimate economic downturn which might, in retrospect, be a significant recession with a dash of inflation to make it really fun. I was discussing this issue with our COO, Jason Treida, who is of the opinion that this should be a very good time to really re-examine the reverse auction strategy and implementation. Basically, the theory goes that suppliers with less than full capacity production or deployment, will be very aggressive to gain/maintain business. In fact, many drop prices without provocation. This makes a lot of sense and the pressures being exerted on every company will force strong resulting pressure on many suppliers in the supply chain. However, it will only work consistently when applied to the proper supply markets which have those prior existing situations.
The global economy is much more complicated to distill into a basic maxim, however. So, I pinged Pierre Mitchell to bring a little class and panache to ESF, a nice change from the beer swilling alehouse that I call home. According to Pierre:
My POV is that it’s not a question that means much because the USD weakness and the rise of commodity prices does not lend itself to using RA’s for leveraged categories – a great strategy when riding deflationary markets – and unfortunately deflation is happening in the consumer markets but is being dampened by commodity prices from the back of the supply chain. Hopefully firms already have LTAs and other hedges in place – if not they need to find other things they bring suppliers than a checkbook. It is however a good opportunity to do better demand management and other broader cost reduction and innovation improvement efforts.
Excellent analysis, as usual. I just hope things do not get as bad as we are hearing the pundits prognosticate, or we may see the practice played out with live ammunition.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices, e-Sourcing Marketplace
January 25th, 2008
David Bush - Iasta
The Sourcing Grid is one of those concepts that is often talked about and, even more often, draw on dry erase boards and notebooks across the land. I was happy to see SCDigest publish a version from Dr. Ed Marien, professor emeritus at the University of Wisconsin. His version is available here:
Determining which grid your item is located, is usually very helpful to determining the proper strategy for sourcing it. Fortunately, most eSourcing tools have become quite proficient at executing sourcing projects across many of the quads. In the past, it would have been accepted to relegate eSourcing to the second quadrant for simple competitive sourcing. However, I have personally seen advanced sourcing optimization present significant value on the right half of the grid.
Entry Filed under: General, Supply Management Best Practices
January 24th, 2008
David Bush - Iasta
Charles Dominick had a good story about purchasing a new vehicle, which reminded me that I was going to blog about my own process of buying a new car. Last month, we decided to go through the same assessment in my own purchasing department which includes me starring as CPO, Director and Buyer. The process was handled differently but the results came in pretty good!
To begin, I have to agree with Charles that some of the biggest houses in Indy (just like Pittsburgh) are owned by the car dealers, so all the crying poor should never be believed. Next, his method involved sitting at the table and hashing out the details in negotiation format. Of course, there is no way I was about to do that when I live and breathe the sourcing efficiency model.
Phase I of my process was to soundedly prepare by evaluating the Honda and Toyota options that we were interested in and develop my own specification of EXACTLY what was going to be purchased with absolutely NO margin for alteration. Once it was decided the options that were going to be on the vehicle (from both manufacturers), I did my research on publicly available data to know all the model numbers and option packages. This information would be used to make sure my vendor knew that I knew what I was talking about. Phase II was to begin after Christmas and before New Years, I needed to take advantage of what I knew about my suppliers - they have end of year and end of quarter goals/quotas which effects their incentives and cash back from the manufacturers. Also, unknown to many people, is that dealerships that move higher numbers of vehicles usually get preferential allotments of new, hot models. So, they need to push these cars off the lot, some will be high margin, some not. I planned to occupy the “not” category.
Phase II was ready to go the day after Christmas, when the dealers reopened. I had prepared faxes which clearly stated the model and options I wanted, with no exceptions. I faxed this one page letter to every dealer in Indiana, both Honda and Toyota. Although, I felt the Toyota was slightly better, I was not willing to pay for it. I had condensed this decision into a 6 day window to be sure that I took advantage of my beneficial timing.
I learned quickly, from my supplier feedback, that the Toyota’s were in very short supply, but there was a inventory glut on Honda’s of the competitive model. This quickly changed my strategy to the Honda model, which was now the focus. Based on my fax comunique, I got about 40% response rate and started learning where the price floors were because some suppliers had more incentive to sell vehicles than others, so they came in with aggressive pricing early.
Knowing now what I would buy and having a short list of vendors (and most importantly, knowing where to begin negotiation) I began the process of speaking with my preferred suppliers. Once I made sure that every one understood the specs and we were all talking about equivilent vehicles, I added in a new component of a 7 year extended warranty, which I also knew the pricing floors because of quotes from other dealers. (This is a commodity, they are all selling the same thing and some dealers will mark up the warranty heavily when the invoice price gets too low). Barring some additional gorey details, I made my final decision based on an Indy dealer over a Fort Wayne dealer because I valued my time (2hr drive one way) over the $100 lower cost.
In the end, I got our new vehicle at over 30% off MSRP and an estimated 15% off what I think would have been possible, if I had not all the information clearly presented to me. If you have not figured this out, what I did was a manual reverse auction with all the necessary planning upfront which provided me all the leverage throughout the process. I definitely came through the process as a very informed buyer and, consequently, was able to contract the lowest possible cost that my vendor was willing to provide but still benefit from the deal.
My only regret? I wish I had done this with the Iasta SmartSource software. I feared that my compressed time frame and unknown sophistication of the supply base, might lead to decreased participation and bids. In hindsight, I do not think this would have been a problem, as most dealers were very prepared for online communication and likely would have placed their bids online for each lot that I constructed (base price, taxes, warranty, documentation fees, etc). The additional benefit would have been real time feedback where they could have seen their rank. I think their curiosity would have lead to bid adjustment over the multi-day period.
Man, that would have been awesome. In retrospect, I might have had a chance to make history as being the first consumer to ever purchase a car in an online reverse auction. But alas, I will need to just take the thousands of dollars I saved and be happy with the 4 star resort vacation we are taking in February.
Entry Filed under: General, Reverse Auctions
January 23rd, 2008
David Bush - Iasta
In this post I summarize the sixth installment of the CPO Agenda 2007 debate series - How can your function drive growth and innovation? that took place in Frankfurt on October 30. As always, my summaries of the previous debates on World Class Procurement - The British Perspective, The Next Wave of Savings, Global Sourcing - A Scandinavian View, What Capabilities Do You Need To Operate In A Global Market?, and Key Challenges of Tomorrow are still available in the e-Sourcing Forum archives.
The debate included, among others, Gregor van Ackeren of Grohe, Giuseppe Conti of Firmenich, Manfred Gamauf of Mondi, Ian Miles of Emptoris, Nima Motazed of Erste Group, Ulrich Piepel of RWE, Thomas Schnadt of Credit Suisse, Bettina Wietzel-Skakowski of Commerzbank, and was chaired by Geraint John, editor-in-chief of CPO Agenda.
As with the previous posts in the series, I am going to summarize key points from each contributor around the primary concept of innovation.
Gregor van Ackeren
If you want to be an innovation driver, having the right KPIs is essential.
Giuseppe Conti
We’ve challenged the company to introduce open innovation networks for our research.
I think what’s important is getting people with broad business skills.
Another factor is understanding how the innovation process works; if you are not aware of what is going to make an idea fly or not, then you are not going to be effective in picking the right ones from the ideas you are presented with.
Manfred Gamauf
You have to define what innovation is, because there are different levels.
Ian Miles
Innovation is about something that is new. It doesn’t have to be completely new, it’s just something that is new to your organisation.
A number of companies I’ve worked with are clearly identifiable as having an innovation culture. I’m convinced it’s far more straightforward for procurement to be innovative when they are working in a business that has one.
With innovation it’s not every idea you have, it’s every idea you commercialise. It’s about the management of innovation, how we reject the bad ideas, how we make sure we can nurture the good ideas and bring them through to completion.
Nima Motazed
For me innovation is doing something really new and getting competitive advantage.
Ulrich Piepel
We transformed our lead buying organisation into a sourcing organisation that included technicians. We said “Let’s try to standardise, let’s try to bring in innovations from suppliers, or let’s talk about our own ideas for innovation”.
Thomas Schnadt
You can’t just hide in a supply management box and say “cost savings is all that I do”. You have to be networked with your colleagues from all the other parts of the organisation and then you can say that innovation is part of daily life.
Bettina Wietzel-Skakowski
Innovation is also about bringing knowledge of markets - especially suppliers and technology - into the company.
I think we should distinguish between two things: continuous improvement - doing things better, faster, with more savings and so on - and real innovation. My definition of innovation is much more than continuous improvement.
To briefly summarize, innovation is about something that is new - it doesn’t have to be completely new, just new to your organization. It requires the right, innovative, people with the right business skills and openness to embrace new networks, new supplier ideas, and new ways of doing business. It’s about embracing and understanding the process, the culture, and the idea.
Entry Filed under: General, Supply Management Best Practices
January 22nd, 2008
Michael Lamoureux
A great sourcing department is led by a great sourcing leader - but what does a sourcing leader do that sets her apart from everyone else? Simply put, to earn her place at the top, she astricts. More specifically, great sourcing leaders analyze, strategize, believe in team recognition, innovate, focus on compliance, use technology, and always have an eye out for sustainability. More specifically:
- Analysis
A sourcing leader understands the importance of analysis and carefully analyzes the situation before making important decisions, putting something up for bid, or signing a contract. She has a data-centric approach, based on spend analysis, that she uses to cut through the nonsense and find the real opportunities.
- Strategy
A great sourcing leader recognizes that the truly successful don’t get ahead by flying by the seat of one’s pants. She also recognizes that no one gets ahead by just focussing on day-to-day tactical operations. A great sourcing leader has a strategy. One that is built on a solid foundation, based on detailed and thoughtful analysis.
- Team Recognition
A great sourcing leader is a team builder that believes in regularly recognizing and rewarding her team for her accomplishments. This recognition comes in the form of public praise when they succeed, bonuses when they exceed savings targets, and a salary that’s at least at the high end of market average.
- Innovation
A great sourcing leader is focussed on constant innovation and improvement that enables her, and her organization, to not only adapt to the market, but to lead it where they want it to go. A great sourcing leader is constantly on the lookout for new innovations in technology, business process, and relationship management that she can use to improve the operations of not only her unit, but the enterprise and supply chain as a whole.
- Compliance
A great sourcing leader recognizes that compliance is not just the multi-faceted buzzword of the day, but the key to realizable savings, low risk operations, and positive press.
- Technology
A great sourcing leader is always on the lookout for new technologies that can help her team get a better handle on the supply chain as a whole as well as for new best-of-breed technologies that can improve performance in key activities with the potential to generate significant value or advance the overall organizational strategy.
- Sustainability
A great sourcing leader knows that sustainability is more than just a buzzword, it’s the key to successful business year after year. That’s why she makes sure that each strategy employed is sustainable, that each supplier used is responsible, and that environmental and social responsibility is always considered.
For more information on The Seven Scruples of a Sourcing Sensei, I strongly encourage you to check out the new Sourcing Leadership wiki-paper over on the e-Sourcing Wiki. Besides diving deeper into each of the actions that a sourcing leader does differently, it also discusses The Seven Savors of a Sourcing Sensei, or the seven key fundamental skill sets that set sourcing leaders apart from others.
Entry Filed under: General, Supply Management Best Practices
January 21st, 2008
David Bush - Iasta
Adrian Gonzalez of Arc Advisory Group, wrote an article in a recent newsletter which begins with:
I was listening to the radio this morning and an ad played for the station, promoting how they play today’s hit music, with few commercial interruptions. The promo, voiced by a woman with a soothing voice, ended with what I’m guessing is the station’s new tagline: “92.9 WBOS, A Carbon-Neutral Radio Station.” What the heck does that mean, I wondered. It seems like everybody is jumping on the “green” bandwagon these days, including everyone in supply chain management.
I thought this was pretty funny, but he goes into some of the take aways from the presentations that were given at the CSCMP conference on sustainability. The final summary was speculating on whether consumers would actually pay more for green products. This is an interesting question that will be asked for a long time.
Are consumers willing to pay more for green products? This is the million dollar question, and most people think the answer is no, except for certain niche products. It’ll be interesting to see what happens to the toy industry this holiday season, after the ongoing recalls of toys manufactured in China containing lead and other toxic substances. Then again, consumers haven’t cared much that Apple’s iPhone contains brominated flame retardants (BFRs) and polyvinyl chloride (PVC), toxic substances that other phone manufacturers have eliminated from their products. Apple has sold over 1.4 million units since the end of June, and analysts forecast strong sales during the holidays. At the end of the day, consumers vote with their wallets; if we don’t change our buying decisions, why should companies change their practices?
I have to say that I probably agree with this, especially on a consumer cost curve the goes up. In fact, its probably more like a bell curve that inexpensive items and luxury items will have the consumer decision effected by environmental conscience, but the wide middle ground will not. This leaves companies to plan for, and benefit from, cost savings only through effective supply chain sustainability for most of their products. Sales will probably not change from these changes.
Last week, my wife (growing increasingly disturbed by the amount of consumables in our house), came home with 5 nylon shopping bags from Meijer. I found this concept fascinating, it works because every one wins. My wife’s guilty conscience is briefly soothed, while the execs are grinning behind closed doors about the fact that they:
1. just lowered their costs by purchasing less paper and plastic bags,
2. charged the client a voluntary “tax” for shopping at Meijer, essentially turning the shopping bags into a profit center, and
3. get to do it all with a straight face of becoming more environmentally friendly.
I would be pretty proud of myself if it was my idea and some body probably got a promotion because of it.
Entry Filed under: General, Green Sourcing
January 18th, 2008
David Bush - Iasta
Sshhh! It’s America. When I was in Europe last month, it was a lot of fun drinking $9 coffees and $7 deli sandwiches. It was also obvious that it is not the good ole days of the powerful dollar. I came across this article, which refers to the USA as the newest LCCS opportunity. This, of course, is not exactly like China or India was a few years ago, but the point is taken. Sourcing in the USA is becoming a strong strategy for many foreign companies that are taking some hard hits on the current exchange rates. 2008 should make for some interesting changes in supply chains.
Entry Filed under: General, Global Supply Issues/Risk
January 17th, 2008
David Bush - Iasta
Aberdeen recently released an informative research brief entitled The Supplier Enablement Challenge that pointed out the importance of supplier enablement. They found that Best-In-Class companies that had achieved decent supplier enablement had 15% more spend under management (78% to 63%), requisition-to-order costs that were 30% less ($22 vs $32), requisition-to-order cycles that were 60% shorter (1.8 days to 4.5 days), and 21% less maverick (off-contract) spend (17% vs 23%).
More importantly, they pointed out that you should ignore the 80/20 rule when it comes to supplier enablement. Simply focussing your efforts on the top 20% of suppliers that constitute approximately 80% of your spend is not enough - it’s often the remaining 80% of suppliers that constitute the majority of problems when it comes to supplier interactions. You want at least 80% of your suppliers enabled, and preferably every supplier with web access.
The survey also found some very disheartening statistics. Even in best-in-class companies, the amount of spend that can be catalogued that is actually in a catalogue is only 35.3%, the percentage of requisitions off catalog is 30.1%, and the percentage of catalogs managed by suppliers is only 41.7%. Considering a solution like Vinimaya can easily catalogue anything available over the web, and all a supplier has to do to customize a catalogue for a buyer is provide a custom price feed, these statistics should be over 90% for catalog available items, under 10% for requisitions off catalog, and over 80% for catalogs managed by suppliers. Furthermore, the survey also found that it takes Best-in-Class enterprises approximately twenty-three days to on-board a new supplier. On average, it takes Vinimaya one.
The survey concluded that companies that want to be supplier enablement leaders need to leverage supplier networks, catalog hubs, and punchout catalogs. But while this is true, as the doctor pointed out over on Sourcing Innovation, what they really need to do is leverage agent technology - supplier network 2.0 technology, to speed up their enablement. Furthermore, they need to integrate their enablement strategies with their e-Procurement systems to make sure spend is on contract at the contracted rates. This is even more important than integrating your sourcing system with your e-Procurement system. In any given year, you’re only strategically sourcing a few of your big commodity categories. But you’re buying every category every day.
Entry Filed under: General, Suppliers, Supply Management Best Practices, Technology
January 16th, 2008
David Bush - Iasta
SCDigest ran a commentary recently which spelled out five recommendations for improving your results for eSourcing.
- Prioritize The Trinity Of Reliability, Quality And Price
Very true, eSourcing does not change what you would normally do when going through a sourcing exercise, it just enhances it. If you sense the loss of a critical milestones, recalibrate and get it right.
- Use e-Sourcing Strategically
SCD claims here that not all projects are suited for eSourcing. This is a classic trap and not true. It is true that not all things should be reverse auctioned, but teams should get used to using other tools like RFx and optimization for specialized opportunities. Additionally, the sourcing team should be capturing the spend information to maintain quality reporting in the management dashboards.
- Provide Clearly Defined And Relevant Specifications
Again, to point one, have good specs whether you are on or offline line and issuing a bid. Otherwise, you should just “re-order” and not “source”.
- Focus On The Quality, Not The Quantity Of The Supplier Pool
Here is a good point and where your sourcing organization needs to get serious about using RFx technology to the fullest of its capabilities.
- Encourage Suppliers To Participate In Shaping Negotiating Terms
Using collaborative bidding tools like multi-round RFx or optimization allow a much more interactive bidding experience and where suppliers stay engaged and productive for the entirety of the project.
Don’t forget the most important one!
Utilize your eSourcing vendor for high quality support and guidance in eSourcing best practices. In all likelihood, they have already been there and done that, with regards to the problems that you are staring down.
Entry Filed under: General, Optimization, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx
January 15th, 2008
David Bush - Iasta
We frequently get asked questions, such as to what the bottom limit of eSourcing might be? There are a few factors to take into consideration when responding to this question, but the short answer is, there are no limits.
First, it should be noted that there are limits to spend on fully managed reverse auctions. This is for obvious reasons, since the fees for this process can easily reach 10% of the spend value, once you go below certain thresholds (and depending on the vendor). As a general rule of thumb, I would cut off the spend to be managed by a third party somewhere around 5% of spend. This will give you ample room to eclipse the fees and still capture the savings.
Taking this situation out of the thought process, you can now effectively argue that you should never consider a lower limit for sourcing automation, which is essentially what eSourcing is. This is why your organization should always be considering a self-managed eSourcing application. There is no reason a $5,000-$10,000 bid should not be done in the process that has been developed within the eSourcing application. I have seen many successful reverse auctions under $25,000 in spend for great categories like fence construction/painting, shotgun shells, solvent delivery/removal, coffee services, etc. Not only are you actually sourcing the category, but the spend is being captured in the software and can be reported on and tracked.
Make sure you consider all the benefits of eSourcing when trying to determine the low end of effectiveness.
Entry Filed under: General, Supply Management Best Practices
January 14th, 2008
David Bush - Iasta
I have heard from a few different sources that an eSourcing vendor is close to being acquired by a major consulting firm. Now this would not be the type of acquisition that has already occurred, between Perfect and Cormine, which has virtually no impact on the eSourcing landscape. The potential acquisition I speak of, would be considered a major event and bring a multi-billion dollar monster into the fold. Although, I have been told this a few times now, I should mention that I still do not really believe it and also have had other reliable people say that there is no way this can occur.
My intention of this post is not to speculate on this particular rumor. I did want think through some of the potential ramifications of a deal like this, should it ever happen to these companies, or any others. What happens to the general eSourcing space if it shifts from software to consulting? Will there be a “land-grab” of other acquisitions and alliances? Will innovation suffer? Will eSourcing users be effected? etc, etc.
Obviously, SAP and Oracle are already a big part of the eSourcing decision process, so having very large companies involved is nothing new. In most cases, these companies gobble up more users from the sheer ERP momentum, technology spending, and IT influence/power - which typically dwarfs procurement. Rarely, do the ERPs win with their functionality, their services, or have the procurement department willfully choose their products. Our experience has been consistent that the decision comes down to how much the sourcing team can make autonomous decisions about technology and resist the overwhelming force coming from IT and the executive corner office, who has had long term relationships with consulting firms. Many times, the decisions made by internal committees and sourcing teams are overridden by an executive that only goes back to the previous engagement.
This scenario is different, though. We are not talking about multi-billion dollar software giant any more. Now, it is companies of equal size but with procurement and supply chain expertise, that are willing and capable of selling multi-million dollar sourcing services. Will this have a long term effect on eSourcing? Of course it will, but how great will the impact be?
- Possibility 1: Innovation reduction - Let’s face it, innovation is almost exclusively the territory of smaller software vendors. We make things happen, then bigger companies either copy or acquire it. By reducing the number of smaller eSourcing vendors, innovation may potentially suffer for a period. This lack of innovation will, strangely enough, be coupled with cost increasing since the overhead will be so much different to operate the new “software” company.
- Possibility 2: The Domino Effect - If the technology industry is good for one thing, its predictability. As history has proven, time and again, once an arms race begins, it generally does not stop until the nukes cover every square inch of the Earth. I would imagine that, if this type of acquisition occurs, it would lead to, at a minimum, multiple tight (possibly exclusive) alliances and, more likely, a string of copy cat acquisitions that lock up technology. This only makes sense for the acquiring company, since the the supply of quality eSourcing vendors is very tight. They could have very strong competitive advantages if they squatted on good solutions for themselves. Conversely, eSourcing providers that hold their ground, will have the world as their oyster.
Note: This has been tried before, and the insider stories about the consultants that would not even recommend the product they owned, are shocking. As a result, the eSourcing vendor languished for years with no direction or hope for success. This is despite a tremendous start and being a leader early in the decade. So, although something looks great on paper, it has failed miserably in the past and is not guaranteed to succeed.
- Possibility 3: Skills erosion - Just like taxes, it is almost guaranteed that when large consulting companies get embedded, they foster a culture of laziness and complacency. “Oh, just let the consultants do it” becomes a well tread mantra. If a huge services company acquires hundreds of software licensed clients, it is very conceivable that there will be major cost increases and talent erosion, as they get deeper involved in all the processes around eSourcing.
- Possibility 4: Vendor absorption - This does not even seem like a question. If a services company takes over a technology company and it represents under 1% of its revenue…bye bye. We will not be hearing much from this vendor any more, as they will just become a pawn to be moved about while $10,000,000+ outsourcing deals are negotiated.
One thing is for sure, nobody can see the future. I feel that I know enough about this area to throw some opinions out there, but I have no real insight. However, I have speculated this exact situation would happen, but I thought it was another eSourcing company that would be the target. They now seem to be off the table, since their fate was sealed in ‘07. We shall all see soon enough, 2008 will much of the same that 2007 offered.
Entry Filed under: General, e-Sourcing Marketplace
January 11th, 2008
David Bush - Iasta
Now it seems like there is a never ending stream of coverage on regarding “The China Price” for outsourcing the manufacturing production of various products. So, when I ran across this article in Fortune Magazine, I was not surprised by the content and story line but was happy to see supply management guru, Andrew Bartolini, of Aberdeen, quoted repeatedly. Obviously, Fortune is a mass audience publication and it is good to see Aberdeen, and Andrew, get some nice publicity outside of the niche of supply chain specific periodicals. Of course, the article is short and offers little depth on the topic, but that would be expected as it is not a research briefing. The gist of the article is about doing your due diligence before fully committing to China sourcing, which should come as no surprise. Congrats to Andrew for big timing us all!
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk
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