Posts filed under 'Global Supply Issues/Risk'
January 7th, 2008
Michael Lamoureux
Security of goods in transit is not a new issue. Ever since the dawn of ocean freight, well before the dawn of the spice trade, traders have had to worry about piracy. And many hundreds of years before that, those who traded by land had to worry about outlaws, bandits, and raiders. However, ever since the attack on the World Trade Center in New York on September 11, 2001, the need for security has heightened - driven by a slew of new security regulations being introduced by countries around the globe.
Whereas back in the nineties all you had to worry about was the Customs Modernization Act of 1993 if you were dealing with the US or the Modern European Customs Code if you were dealing with the EU, today it’s a different story. In the US you have to deal with the new Automated Commercial Environment (ACE), International Trade Data System (ITDS), the Container Security Initiative (CSI), the Maritime Transportation Security Act (MTSA), and the Customs Trade Partnership Against Terrorism (C-TPAT); in Europe you have the Authorized Economic Operators and the forthcoming Modern European Customs Code; and in Asia you have to deal with the Asia-Pacific Economic Cooperation Secure Trade in the APEC Region (APEC STAR).
Each of these acts has its own little caveats, and failure to comply with any act can result in delays, fines, and confiscated, and subsequently destroyed, shipments. Thus, it’s important to understand what these acts are and what they involve. For an overview, I’d suggest starting with the Customs and Security Primer over on the e-Sourcing Wiki. It has a brief description of what all of these acts are as well as starting points for further research. Furthermore, with your help, it will grow and improve over time.
Entry Filed under: General, Global Supply Issues/Risk
December 17th, 2007
Michael Lamoureux
Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.
A Supply Chain Finance Solution, in comparison, is a combination of trade financing provided by a financial institution, a third-party vendor, or an enterprise itself, and a technology platform that unites the trading partners and the financing partners electronically and provides visibility into the various supply chain events that can serve as financing triggers.
Supply Chain Finance is a lot more than just factoring, early payment discounting, or inventory shifting. It’s balancing credit, financing options, inventory management, and other supply chain variables to optimize working capital, and much more. Thus, given the complexity of supply chain finance in today’s globalized supply chains, it is important to have some good strategies in order to ensure that you are reaping the benefits that are there to be gained. It’s also equally important to understand that some of the classic strategies are more apt to be strategies for failure than for success. To this end, here are three strategies for success and three strategies for failure to avoid to start you on your supply chain finance journey.
Strategies for Success
- Balance Open Accounts and Letters of Credits
It’s important to understand an organization’s cost of capital versus the supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into the cost of goods sold.
- Improve Forecast Accuracy
One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.
- Lower Your Supplier’s cost
A recent Aberdeen benchmark report found that 39% of suppliers indicated that their top issue is their ability to access financing at acceptable terms. The more it costs a supplier to make a product, the more it will cost a buyer to buy it. Consider using early payment programs, inventory ownership solutions, and / or virtual consignment financing to lower your supplier’s costs, and your own in the process.
Strategies for Failure
- Shifting Inventory to Suppliers
Considering that most suppliers have to wait an unduly long time between their initial cost outlay to make a product and the eventual payment for that product in an environment where many buyers are now demanding payment terms that include 60, 90, or even 120 Days-Payable-Outstanding (DPO) and that most do not have large storage facilities or inventory management expertise, this drives up their costs from all angles. Their financing charges go through the roof as they have to take out more high-cost short-term financing, often at rates of 20% to 40% per annum (which are especially common in developing economies), their costs of operation go through the roof as they have to either acquire additional assets or pay a third party to manage the inventory, and their opportunity costs rise as they are prevented from ramping up production, due to lack of funds and storage, on New Product Development that could ultimately prove more profitable to them, and to you as the buyer. All of these costs just increase their cost of goods sold, and your price, and your “brilliant idea” to get rid of inventory carrying charges has only served to increase the total cost of ownership of the products you are buying. Nice move, hotshot!
- Increasing Days Payable Outstanding
Most suppliers only have constricted access to short-term financing with a significantly higher cost of capital. This cost-shifting to suppliers might result in better Days-Payable-Outstanding (DPO) statistics to a buyer in the short term, but ultimately results in a less financially stable, and thus higher-risk supply base, and, eventually, an overall higher cost of goods sold to your supplier and you versus your competitors who have mastered sound SCF practices.
- Mistaking Early Payment Discounts and Factoring for Financing Options
Early payment discount programs, regular or automated, do not address the root causes of financial flow inefficiency and can in fact exacerbate the underlying drivers. Instead of shifting inventory to a supplier, you’re essentially shifting costs and this often results in cost increases, rather than cost reductions, across the supply chain.
For more insights on Supply Chain Finance, check out the wiki-paper over on the e-Sourcing Wiki which includes an overview of the benefits to buyers and suppliers, strategies for success, strategies for failure, and tips on both buyer and supplier supply chain finance implementation.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices, e-Sourcing Marketplace
December 11th, 2007
Michael Lamoureux
Ten years ago, the world was a simple place to do business. Make an honest product, follow the import and export regulations (which, relatively speaking, were few and far between), avoid known toxins, and you were all set to go. Today - different story. You have to document, and report on, everything you do, familiarize yourself with various hazardous material safety and bioterror acts, and keep on top of a never ending slew of regulatory compliance acts coming out of the European Union, including the directives on the Restriction of Hazardous Substances (RoHS), Waste Electrical and Electronic Equipment (WEEE), and End of Life Vehicles (ELV).
Probably the most important act in the US is the Sarbanes-Oxley Act (SOX) of 2002, otherwise known as the Public Company Accounting Reform and Investor Protection Act of 2002, which established a new quasi-public agency (the Public Company Accounting Oversight Board, or PCAOB), that was drafted and passed in response to a number of major corporate accounting scandals (including Enron, Tyco International, Peregrine Systems, and WorldCom) in an effort to restore public trust in accounting and reporting practices.
The Sarbanes-Oxley Act contains a number of major provisions that address the disclosure of internal controls at public companies, the certification of financial reports, auditor independence, personal loans to any executive officer or director, insider trading, and required disclosures. Basically, auditors must be independent, independent auditors must “attest” to the disclosure of internal controls, the chief officers must personally certify the financial reports, personal loans to executive officers or directors are banned, and insider trades are prohibited during pension fund blackout periods. Failure to comply with any of the requirements could result in enhanced cival and criminal penalties for violations of securities laws.
In Europe, it’s a different story. Depending on the products you make, it’s either the Restriction of Hazardous Substances Directive (RoHS) that restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment; the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) that broadly covers the production and use of chemical substances; the Waste Electrical and Electronic Equipment Directive (WEEE) that imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers; the end of life vehicles (ELV) that force vehicle producers to have networks of facilities where the last owner of a vehicle may freely deposit such vehicle at the end of its life; or the cosmetics directive that was created to ensure product safety and public health while allowing the free movement of safe products within Europe.
Globally, we have the Kyoto Protocol, various industry codes of conduct, and forthcoming RoHS and WEEE equivalent acts in Asia. It’s a regulatory whirlwind, and it’s not about to stop. That’s why the e-Sourcing Wiki has started a wiki on regulatory compliance. Check it out - and feel free to add to it!
Entry Filed under: General, Global Supply Issues/Risk
December 10th, 2007
David Bush - Iasta
A recent article in ecommercetimes points to information from Booz Allen Hamilton on carbon footprint in food processing. Their basic definition is good for understanding the reasons for designing better ways to increase energy efficiency.
“The four primary factors driving businesses’ interest in the energy-efficient supply chains are cost savings, productivity gains, regulation concerns and emerging end customer interest.”
The story goes on to explain how farmers in the potato industry were given a very strict moisture tolerance for potatoes, but in an effort to maximize weight within the tolerance (and get more money for the harvest), they artificially raised the water levels. These extra grams of water meant more revenue for the same crop. In turn, it took the potato chip manufacturers, more energy to cook off the extra water and cost more to produce the chips.
The solution lies in aligning the incentives on both sides and allowing the manufacturer to take advantage of UK emissions credits while maintaining the producers margins on a lower moisture content food. Booz gives the following recommendations in summary:
“The first step is to understand the specific carbon footprint of your business’s supply chain, in the context of overall strategy and operations. The second step is to discern the extent to which emissions relate to your specific needs, versus those inherent in supply chain management. The third step is to define your approach. It is likely to be a combination of three types of measures:
1. Reducing your footprint through demand reductions and energy efficiency in design, construction and operation.
2. Replacing conventional energy sources and materials with low- or zero-carbon alternatives, including materials and equipment with low-embodied carbon.
3. Offsetting unavoidable carbon emissions through a program of credit trading and other verified means.”
This example comes from the UK but has similar examples everywhere. Understanding where the incentives are and tracing it back through the supply chains are complicated but useful goals in cost reduction.
Entry Filed under: General, Global Supply Issues/Risk, Green Sourcing, Suppliers
November 28th, 2007
David Bush - Iasta
I am always fascinated by the concept of “green” supply chains. This not only because I was an Environmental Science major in college, but because, it is interesting to read where companies can actually lessen their impact on the environment and reduce their costs with the same strategy. It seems impossible on the surface, but very true.
In fact, I like to show prospective clients how they can use our optimization technology to account for green suppliers in their award allocation while maintaining the lowest cost.
To that end, it was great to see a new blog by Avaro CEO, Tim Albinson, which is dedicated to the subject. I recommend saving 2Sustain to your favorites or blog reader and become exposed to concepts that Tim speaks of. His first post was to define sustainability, which is a good way to start.
Entry Filed under: General, Global Supply Issues/Risk, Green Sourcing
November 26th, 2007
Michael Lamoureux
In Part I, David Bush summarized the fifth installment of the CPO Agenda 2007 debate series - What are procurement’s key challenges in the next 10 years? that took place early this summer in Paris and featured a dozen procurement executives from leading companies in the region.
In Part II, after I added what was missing from a minimally complete list, I briefly defined what each of the concepts were and indicated I would tie them together in this post.
First of all, many of the key challenges of tomorrow will be the same challenges faced today. It will still be about knowing where your products are (visibility), risk management to prevent supply disruptions that are becoming all too common, SRM (supplier relationship management) to make sure relationships go smoothly, SPM (supplier performance management) to make sure the course gets corrected quickly if things go wrong, compliance to make sure regulations are adhered to, and the right talent to make it all happen.
And it will still be about having first-rate analytics to know what you’re spending on, and more importantly, where you’re over spending, kick-ass decision optimization to make the best award decisions when faced with multiple cost variables and constraints, applying best practices, accepting corporate social responsibility on the path to sustainability, and embracing outsourcing and group purchasing organizations to help you spend better.
Secondly, it will also be about continuing mastery of the emerging challenges that leading organizations are starting to face. The need to manage collaborative partnerships with strategic suppliers to reduce costs while increasing quality and decreasing turn-around time, the need to incorporate better strategic planning to make sure the procurement function is more closely aligned with the direction of the business and that procurement gets invited to key planning sessions, better change management to deal with the constantly fluctuating nature of business, markets, and consumer demands today, and the introduction of guided sourcing tools to help junior buyers make the right decisions on commonly sourced categories.
It will also be about accepting and mastering on-demand solutions that give you what you need, when you need it; open source principles, practices, and, when appropriate, software to make sure your organization stays current on best practice methodologies; and crowdsourcing to help you take advantage of the new talent pool of independent consultants and semi-retired graybeards that will be constituting a larger and larger part of the available workforce as time progresses.
Thirdly, it will be about embracing some of the radical new philosophies that are starting to enter the mainstream consciousness, but not quite yet a reality at most leading sourcing and procurement organizations. These philosophies include the securitization of capacity and material in advance as well as hedging in emerging energy markets, working with marketing and R&D to help shape demands to levels that lead to optimal profits, using scenario simulation to determine likely demands based upon different price-points and market directions, embracing the concept of the extended enterprise where you understand that your business is but a cog in a larger supply chain clockwork, and replacing your current ERP with a new ERP (SCRP) system built for the distribution supply chain.
Finally, it will be about innovation. It will be about doing things differently tomorrow than you do them today. As time goes on and businesses start to realize its not sales, marketing, and MBAs that ultimately determine their financial success but spend management that insures the business always spends less than the revenues it makes, they will be expecting a transformation of the purchasing function. Instead of the 1950’s paper pushing department that they always thought purchasing was, they will be expecting the 22nd century supply chain design center that spend management needs to become to truly take business to the next level. And even though it will involve everything I’ve discussed in this post and more, it is still anyone’s guess as to what spend management will ultimately be when the company revolves around the supply chain departments, and not the all-talk but no-walk marketing MBA’s that have been running the show for the last twenty years.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices, Technology, e-Sourcing Marketplace
November 20th, 2007
Michael Lamoureux
In Part I, David Bush summarized the fifth installment of the CPO Agenda 2007 debate series - What are procurement’s key challenges in the next 10 years? that took place early this summer in Paris and featured a dozen procurement executives from leading companies in the region.
As per his summary, the key topics that emerged from the debate were “Best Practices. Compliance. Supplier Relationship Management. Supplier Performance Management. Strategic Planning. Collaborative Partnerships. Outsourcing. Talent. Sustainability. The Centralized Business Function. and Innovation.“. And, collectively, the debaters did a great job of summarizing many of the key challenges for the purchasing function of tomorrow and what purchasing is going to look like in five to ten years.
But they didn’t get everything. At a minimum, the following should also be added to the list: On Demand. Analytics and Optimization. Scenario Simulation. Risk Management. Demand Shaping. Guided Sourcing. Change Mangement. Crowd-Sourced Open Source. Capacity & Material Securitization. Visibility. The New ERP. Sourcing as the foundation of the Extended Enterprise.
However, before I explain what the future is, how each of these concepts tie into it, and where they fit into the overall picture, I’m going to start with a brief definition of what each concept is.
Analytics
Analytics is all about analyzing spend to understand spend patterns and opportunities for spend avoidance and reduction.
Best Practices
Best Practices is all about improving the sourcing function from a process perspective.
Capacity & Material Securitization
As initially described by Jason Busch, this will involve companies purchasing production capacity at manufacturing plants and raw materials in advance of their production to meet future forecasts. Then, if they over-purchased, or under-purchased, they will trade this capacity on an exchange in current market rates. This model could work out very well for all parties as it would ensure much needed cash-flow on a timely basis to manufacturers who would gain increased stability and better financing terms and ultimately be able to lower costs and keep them down in the long term.
Change Management
Change management is a structured approach to change in individuals, teams, organizations and societies that enables the transition from a current state to a desired future state.
Collaborative Partnerships
This is where buyers and suppliers work together to serve customer needs and reduce costs in a positive manner. It’s not where a buyer beats up a supplier when they are unhappy with quality or cost.
Crowd-Sourced
Crowdsourcing is the process of delegating various tasks for which you do not have the manpower or expertise from internal production to external entities or affiliations of networked persons with the expertise, access to, or raw capabilities that you require.
Compliance
Compliance is a term with at least as many meanings as there are distinct arabic numerals, but generally refers to either ensuring that spend is on contract, that regulations are being adhered to, or that corporate initiatives are being considered.
Demand Shaping
Demand shaping is a demand-driven customer-centric approach to planning and forecasting that tries to shape the demand to a desired level.
ERP
Enterprise Resource Planning systems were early attempts to integrate all organizational data into a system that could be used for enterprise planning. The advantages were that all data was centralized, processes were encouraged, and queries were answered quickly but the major disadvantage was that ERP was primarily concerned with what happened within the four-walls of an enterprise and not the supply chain it was ultimately a part of.
Extended Enterprise
As most recently described by Jean-Phillipe Massin, the extended enterprise is an aggregation/network of independent and top-performing companies, working together to supply products or services as effectively as they can.
Guided Sourcing
In the future, e-Sourcing technology will contain expert systems that “guide” a junior buyer on the right process to follow in sourcing a certain category.
Innovation
Innovation is progress by way of the new. It’s what business should be all about.
On-Demand
On-Demand refers to the delivery of software over the internet using the Software-as-a-Service model.
Open Source
Open source is a set of principles and practices that promote public access to the design and production of goods and knowledge. The most common instantiation is open-source software, which makes software freely available to the general public with relaxed, or non-existant, intellectual property restrictions. This allows users to create software content through incremental contributions.
Optimization
Decision optimization is the application of rigorous analytical techniques to a well-defined scenario to arrive at the absolute best decision out of a multitude of possible alternatives in a rigorous, repeatable, and provable fashion.
Outsourcing
Procurement Outsourcing is the act of turning over part, or all, of the sourcing function to an external company.
Risk Management
Risk management is the art of predicting, analyzing, and mitigating against potential risks before they happen.
Scenario Simulation
A simulation is an imitation of a real-world process and can be used to determine potential outcomes under different scenarios. It can be especially useful in forecasting.
Strategic Planning
Strategic planning is the process of defining organizational strategy or direction.
SRM: Supplier Relationship Management
Supplier Relationship Management refers to the art of managing all aspects of a supplier relationship to make sure it is a beneficial and productive relationship.
SPM: Supplier Performance Management
Supplier Performance Management is particularly concerned with measuring, managing, and improving supplier performance on an ongoing basis.
Sustainability
Sustainability is another one of those broad categories that could refer simply to business viability, to environmentally sound practices, or to the broader subject of Corporate Social Responsibility.
Talent
Talent refers to people - brilliant people capable of doing a brilliant job - and talent management refers to the art of identifying them, recruiting them, retaining them, and when necessary, retiring them in a positive manner.
Visibility
Yet another of those over-used and often misunderstood terms, visibility could refer to spend visibility, it could refer to inventory visibility, or it could refer to potential disruption visibility throughout the supply chain (as in a supplier’s supplier needs titanium for its part and there’s a shortage on the market).
Z’allgood
The phrase we all hope to say someday when someone asks “How’s it going, dude?”, unless, of course, you’re Canadian, then, when someone asks Howse it gowin’?, you answer Z’allgood, eh?
So, now that we’ve got the basics covered, I’ll put the pieces together in part III.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices, Technology, e-Sourcing Marketplace
November 13th, 2007
David Bush - Iasta
I have no idea, but SCDigest tried to take a stab at it recently and, of course, they do not know either. However, this article does a nice job of presenting two sides of the issue. We deal with freight and fuel surcharges frequently, here at Iasta, because we have many clients in the food service, retail, manufacturing and CPG industries. These global companies are constantly dealing with the impact of freight to landed cost.
The information in this story describes the Goldman Sach’s view that indicate crude oil will be $95 by the end of 2008. (I remember when $100 barrels of oil where considered doomsday scenarios no more than 2 years ago!). This would be a catastrophic development.
However, ISI Group’s - Mike Rothman, predicts more sane levels of $45 a barrel and has a deep portfolio of data to back up his claims. The summarization at the end is equally non-conclusive by stating, “So for which scenario should shippers plan? It’s impossible to say, of course, other than to note Rothman’s view is based almost exclusively on supply-demand data and historical patterns. Others say “It’s different this time.” One thing we do know is that geopolitical events can have a huge impact on perceptions and can also drive prices higher regardless of the fundamentals.”
Of course, if we knew what was going to happen, it wouldn’t be very fun though, would it? Plus, how are all those traders going to make their Ferrari payments if they are not moving the price of oil around on a daily basis??
Entry Filed under: General, Global Supply Issues/Risk
November 1st, 2007
David Bush - Iasta
Well, I should start off by confessing that this post has nothing to do with the recent publication titled Sourcing From China - Lessons from the Learners from the Boston Consulting Group. It’s actually about a recent article in Supply & Demand Chain Executive called Global Sourcing: Is It Really Worth It? - which is a great follow-up to my last post.
The article starts off by noting that international sourcing and procurement can still lead to high rewards, but these rewards bring high risks. It then provides a number of reasons some companies go global. The reasons listed are:
- cost reductions, especially in labor
- fresh research, design, or specialized intellectual capital
- new technology and capacity availability
- plans to sell or service locally
- raw material proximity
- superior quality
Of course, not all capabilities will necessarily be available in any one country and the most important reason(s) will dictate what countries you should be looking at, but it’s good food for thought. The article then overviews five critical questions that you should ask, and answer, before embarking on a global sourcing initiative. These questions are:
- What are the assumptions that would make LCCS a good business decision?
Payment Terms, Direct Costs, Delivery Costs, Flexibility, Quality, etc.
- What are the macro-economic and geopolitical assumptions that could impact this decision?
Direct Costs, Financial Impacts, Geopolitical Environment, Supply Chain Risk, Government Regulations, etc.
- How do we monitor the assumptions for changes?
Sensing Mechanisms, Alerts, Fluctuations, etc.
- Are there alternatives?
What, Where, Why (Not), etc.
- What’s the Exit Strategy?
If things go wrong, how do we pull out fast?
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk
October 31st, 2007
David Bush - Iasta
Last week, in Part I, I brought your attention to a recent publication from the Boston Consulting Group, Sourcing From China - Lessons from the Learners that contained an exhibit that described the four stages of successful Low Cost Country Sourcing:
- Test the Waters
- Early Engagement
- Full Integration
- Make the Low Cost Country a Center
In response to the post, a reader asked about the effectiveness of e-Sourcing applications in each of the four stages. In this post I am going to provide some insights on how I think e-Sourcing can assist with each stage.
Stage 1: Testing the Waters
In this stage, a company sets up a Low Cost Country sourcing office, rolls out pilot projects, develops processes, generates early results, and gains buy in.
In this stage, standard spend analysis, e-RFx, and e-Auction play a very strong roll. Basic spend analysis is used to identify low-hanging-fruit high-spend commodity categories that can be turned into quick wins, multi-stage e-RFx is used to quickly identify a set of potential suppliers, which are then qualified in successive stages, and e-Auction is used among the qualified suppliers to drive the price down to true market price and get a quick win that can be used to generate buy-in for future effort.
Stage 2: Early Engagement
Expansion occurs through multiple waves as the supply market dynamics are understood, processes fine-tuned, capabilities expanded, and IP protection addressed.
In this stage, more of the high-spend categories that were not addressed in stage 1, either because they were not likely to generate quick wins through standard e-Auctions or because the items were somewhat customized in nature are addressed. e-RFx is still used heavily, but more advanced cost models and basic award decision optimization is brought into play as multiple factors are considered in the award allocation. The advanced collaboration and document control capabilities of the platform are used to insure that only authorized users have access to sensitive IP, which is revoked if a potential supplier does not win a contract; and a contract repository is built to track contract terms and conditions.
Stage 3: Full Integration
In this stage, Low Cost Country sourcing is integrated into the company’s global procurement process, suppliers are included in the design process, and the Low Cost Country is integrated into the extended global supply chain.
In this stage, the full capabilities of a true spend analysis tool are used to identify all possible savings opportunities, advanced decision optimization is employed to make sure that the buy makes sense in terms of the network (as transportation costs and late shipments can cost more than the projected savings associated with an item on a unit cost basis), the contract T’s and C’s are tracked in the e-Procurement system to make sure all invoices are n-way matched and negotiated savings immediately realized (and alerts sent out if something is wrong), and supplier management technologies, particularly in the area of performance and enablement are introduced.
Making the Low Cost Country a Center
The Low Cost Country becomes a critical supply base, some procurement functions are migrated to the Low Cost Country office, and suppliers become an integral part of the company’s product-development system.
This goes beyond a full end-to-end e-Sourcing suite and into proper structure and management of the procurement function. Without a good strategy, organization, leader, and processes, an e-Sourcing suite won’t save you. However, if everyone is done right, it’s the key to unlocking the savings you identify.
As a final note, this advice, as well as the advice from the Boston Consulting Group, applies to any Low Cost Country, not just China!
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Supply Management Best Practices, Technology
October 30th, 2007
Michael Lamoureux
A recent study by McKinsey & Company and the Supply Management Institute found that high performing firms have high performing purchasing departments, that what matters most is the people in the purchasing department, and that purchasing departments staffed with talented, motivated, and interactional personnel achieve, on average, savings that is two-and-a-half times higher than their peers who haven’t yet figured out that when it comes to supply chain, People Matter Most.
Therefore, should you be so lucky as to acquire exceptional talent, it is key in today’s economy that you hold on to it. The following are ten tips that might help you do just that.
- Organizational Culture
An organization needs the right environment to attract and retain the highest calibre procurement talent. Although this is hard to define, a good start is the right mix of openness, diversity, ethics, sustainability, fun, and support for work-life balance.
- Give Them Space
Empower employees to make their own decisions and give them the room to do so. Encourage them to try new ideas and don’t break out the whip if they fail, as one can often learn more from failure than from success. Also provide employees with the freedom that allows them to get the job done in the ways that work best for them.
- Mine for Opportunities
Involve the organization’s best people in strategic planning when the search is on for the next great opportunity and allow them to head new projects or spend categories on their own.
- Challenge Them
Ensure that BIG and NEW purchasing challenges are presented to them on a regular basis. Great talent is drawn to the opportunity to work on big things and to apply new thinking.
- Training
Good training starts on day one, from the minute a new recruit walks in the door. Before the recruit was hired, the manager should have laid out the skills relevant to the role, identified potential gaps, and developed an appropriate (on-the-job) training program to get the new employee up to speed as soon as possible.
- Mentoring
Mentoring facilitates knowledge transfer, helps the organization take advantage of lessons learned, and makes both the mentor and the mentored feel valuable.
- Career Path
Good procurement personnel are ambitious. They want to know that they can advance over time. Make sure there is a career path for every employee that starts at junior buyer and goes all the way to CPO.
- The Right Equipment
Every professional needs tools. This goes doubly so for procurement professionals who often have the hardest job of all managing the organization’s global supply chain. Make sure they have the right sourcing, procurement, logistics, inventory management, and contract management tools (to name a few) that they need to do their job effectively and productively and don’t be cheap when it comes to technology.
- Rewards
A good salary is often the top indicator of employee retention, and often the top reason an organization loses its top talent. Know what your top people are worth on the open market and do your best to compensate them justly.
- Proactive Stay Interviews
Even if the organization has the right culture, makes efforts to empower its employees, mines for opportunities, challenges the team regularly, offers continuous training opportunities, institutes mentorship programs, establishes a career path for each employee, gives them the right equipment, and rewards its employees handsomely, don’t assume this is enough. Everyone is different and every team is different. Instead of guessing, find out what your staff really want by asking them.
For more information on Talent Management, check out the Talent Management: Build and Retain World Class Sourcing Talent wiki-paper over on the e-Sourcing Wiki which covers the five R’s of talent management - resolving, recognizing, recruiting, retaining and retiring, skills development, and succession planning.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices, e-Sourcing Marketplace
October 23rd, 2007
David Bush - Iasta
Boston Consulting Group, a highly respected consultancy, has released a new publication named Sourcing From China - Lessons from the Learners. It is another one of these reports that I have come across recently which is a digestible size and easily read. I recommend downloading and saving, if your organization does any offshoring or plans to. Understanding the risks versus the rewards is the first thing that should be done before proceeding. It can be wildly successful, or implode spectacularly. Or, more likely, it will be somewhere in between, and require more than you ever anticipated.
Of interest to me, was an exhibit which describes the four stages of successful China Sourcing. These follow as Stage 1: Test the waters; Stage 2: Early Engagement; Stage 3: Full Integration; Stage 4: Make China a Center. A larger version of the image is available below.
BCG also identified ten recommended best practices (nice, convenient round number) which they go into great detail on each. At the high level three listed that I found helpful and interesting were:
- Define a clear sourcing strategy with specific targets and plans
- Align the China Sourcing Organization with Global Procurement
- Gain 100% transparency into Sourcing volumes and savings
Its a good report and worth saving for reference.
Entry Filed under: Analysts/Research, Global Supply Issues/Risk, Suppliers
October 16th, 2007
Michael Lamoureux
Low Cost Country Sourcing, often abbreviated LCCS, defined as a procurement or sourcing strategy in which a company sources materials from countries with lower labor and production costs in order to cut operating costs, is not a new subject. IIn fact, it’s a rather hot topic today. Googling “low cost country sourcing” (without the quotes) generates a whopping 1.9M hits. However, given the dizzying array of information, it’s hard to know where to start.
However, before you start, the first thing you should do is familiarize yourself with the challenges you will need to overcome in order to have a successful project. LCCS comes with a number of challenges that include product quality, supplier quality, resource quality, logistics, reliable delivery, supply assurance, supplier bankruptcy, and the inherent complexity of remote supplier management. Furthermore, the reality is that even today, many large global organizations are not fully prepared to embark on ambitious LCCS projects.
First time LCCS projects, especially those that are poorly planned, are often wrought with budget overruns caused by underestimated transportation costs, additional inventory costs due to uncertain lead times and long order cycle times, bad data, and fluctuating demands. Furthermore, there is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. In China, a factory might have state of the art production equipment recently bought from a U.S. supplier (as a result of the weakening US dollar) but that same factory might not even have the capability to ship a standard palette.
This gives us our first step to success - before selecting a supplier, it’s important to meet with the supplier and conduct on-site visits and assessments. But it’s even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money. Use third party information services such as those provided by Austin Tetra and Open Ratings, do reference checks, collect detailed information on operations and capabilities through eSourcing tools from the suppliers themselves, and have introductory calls and video-conferences before investing in the remote meetings and site visits required by a full qualification.
The next step to success is to take a total cost of ownership approach when evaluating a potential low cost country supplier - not just a total landed cost approach. This includes increased inventory carrying costs, duties, import and export taxes, and additional financing costs. Furthermore, this calculation must be updated regularly throughout the process, as it can often increase as one progresses further into a project. If the point is reached where the estimated savings are not worth the increased risk, the project should be dropped, at least with respect to the categories one was considering outsourcing.
The final step to success that is going to be mentioned in this blog entry is to hire top-notch external expertise with experience, and this is especially important for small and medium sized organizations which likely lack some of the skills necessary to succeed in a low cost country sourcing effort. It’s true that the right consultant might not come cheap, but the value such a consultant can provide the organization will pay for the consultant many times over once a successful LCCS operation is in place.
For more insights on Low Cost Country Sourcing, check out the Low Cost Country Sourcing: A Blogger’s Perspective wiki-paper over on the e-Sourcing Wiki which includes an interview with Carl Greppin (Transpac Access) and blogger insights on the challenges, destinations, and required steps to success.
Entry Filed under: General, Global Supply Issues/Risk, e-Sourcing Marketplace
October 9th, 2007
David Bush - Iasta
In this post I summarize the fourth installment of the CPO Agenda debate series - What Capabilities Do You Need To Operate In A Global Market? that took place in Milan in the Spring. My summaries of the previous debates on World Class Procurement - The British Perspective, Global Sourcing - A Scandanavian View, and The Next Wave of Savings are still archived here on eSourcing Forum.
The debate included Danilo Augugilaro of UniCredit, Stefano Baghetti of Alenia Aeronautica, Paolo Cova of LeasePlan, Giorgio Diazzi of Siemens, Luca Guzzabocca of GlaxoSmithKline, Lorenzo Laurelli of EMEA/Emptoris, and Paolo Mondo of Accenture. As with the last post, I am going to summarize some of the key points from each contributor.
Danilo Augugilaro
e-Auctions have an advantage in terms of opening up the market to foreign suppliers, because the process (when executed appropriately) provides a level of transparency and trust.
Stefano Baghetti
When creating your business plan, you need to consider not only the final costs of the products you buy from suppliers, but also your own costs in monitoring their activities, especially if they are located in a low-cost country. It is important to develop reliable suppliers and to find people inside your company who can develop this co-operation.
Paolo Cova
Leveraging scale and improving the professionalism of procurement at both an international and a local level is one of the keys to profit and competitive advantage in the future. You can better leverage scale if your fulfilment partners are able to leverage it as well. This means, for example, that you have to find international companies able to deliver the services you need and establish partnerships with them. Consider splitting your spend into commodity groups and organize international procurement task forces for each group, composed of representatives from the different companies you operate in or buy from.
Giorgio Diazzi
The real challenge today is to understand what should be done globally and what should be done locally, and how we can get suppliers to provide the right level of service at the global level. Also, today we need people with real international experience, flexibility and competence in process procurement and project leadership.
Luca Guzzabocca
The key critical success factor is to get people skilled and prepared to approach a different environment and to work in teams. Also, you need a clear sourcing process that involves all the stakeholders from different functions. It’s about facts and data. And not just looking at the short-term benefits, but also the medium and long-term impact.
Lorenzo Laurelli
It has to be clear what the strategy is within the purchasing organisation. And, used effectively, technology can push changes in an organisation, streamline the process, bring savings and keep real value within the company.
Paolo Mondo
A global approach should involve the whole company is because you have to take a total cost approach. Also, buyers must have a much broader set of skills and competencies, from technical aspects to financial aspects.
Now, I may not be an expert in globalization, but skilled people, teamwork, the right tools (especially e-RFx and e-Auctions), a solid strategy, total cost of ownership (enabled by decision optimization), leverage of scale (enabled by spend analysis), risk management, good supply partners …that just sounds like good sourcing to me!
Entry Filed under: General, Global Supply Issues/Risk, Interviews, Supply Management Best Practices, Technology
September 14th, 2007
David Bush - Iasta
On the heels of yesterday’s post, I wanted to bring attention to another article regarding the topic of offshoring. This one comes from a publication named Cargo News Asia and comments on some of the proactive measures that buyers are beginning to build with regard to a recent swell of problems coming from Chinese sourced products.
In the face of potential negative publicity among discerning consumers, suppliers in China are facing increasing pressure to conform to demands of brand name retailers for Corporate Social Responsibility (CSR).
A recent China Supply Chain Council conference in Shanghai on IPOs (Internal Purchasing Organisations) raised a number of issues facing buyers and suppliers in China, one of which was the increasing demand for accountability from buyers.
The fact that China might have as many unregistered, migrant workers as 67% of the entire population of the US, is incredible and presents even more daunting issues and shows the amount of due diligence and organization needed to effectively (and safely) source from low cost countries.
Entry Filed under: General, Global Supply Issues/Risk
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