We put a large piece of business out for bid telling suppliers we plan to award a five year contract with indexed pricing. Suppliers bid accordingly and we make the award. The lawyers are unable to reach agreement on the final contract terms but the supplier behaves as if the contract was signed. Three and a half years into the award period we decide to go out for bid telling the incumbent we have no obligation since the contract was never signed. What are we training suppliers to do?
The supplier provides highly competitive pricing based on Net 30 payment terms. After the fact we tell them we need Net 60. They are happy to provide those terms but need to increase the price since Net 60 will require them to obtain a Letter of Credit. We say “no thanks” but pay Net 60 anyway. What are we training suppliers to do?
In the face of uncertainty, suppliers pad their pricing. From the supplier’s perspective, the above behavior was not anticipated, at least the first time. What happens the next time we ask this supplier for rock bottom pricing? Role modeling is the most powerful form of teaching. What are we role modeling to our suppliers? We should pay close attention to that. What goes around, comes around!
This post was originally published on E-Sourcing Forum: http://www.esourcingforum.com/archives/2009/08/27/what-are-we-training-suppliers-to-do-%E2%80%93-paladin-associates-%E2%80%93-barb-ardell/
Thursday, August 27, 2009
Thursday, July 30, 2009
Building Negotiation Strength
Today’s economic situation is unprecedented and calls for unusual actions. As we know, suppliers are not reluctant to re-negotiate an existing contract when there have been substantial, unanticipated changes in the marketplace. Likewise, buyers should not be shy about doing the same. Although you may be under contract for the next six, nine, twelve months or longer you should approach your suppliers to discuss price relief where markets have declined substantially. Hopefully, you will have a “Meet or Release” clause to facilitate this process. Regardless, the strength of your negotiation skills becomes vital to your success!
Mark Trowbridge from Strategic Procurement Solutions recently penned an article for the Supply Chain Management Review entitled “Seven Ways to Build Your Negotiating Strength”. This is one of the best I’ve read on this topic. In particular, Mark discusses how to avoid situations that weaken your negotiating position. A number of these have to do with getting internal alignment regarding the negotiation. All company members who interface with the supplier must have the same objective and speak with one voice.The article then goes on to suggest seven ways to strengthen your position. These actions include:
1. Involve Supply Management Early and Often
2. Differentiate Between Competitive and Collaborative Negotiations
3. Prepare the Team to Fight the Tough Battles
4. Empower Negotiations through Factual Data
5. Negotiate all TCO Elements Before Entering Relationship
6. Shift the Supplier’s Paradigm
7. Leverage the Buyer’s Performance
This excellent article warrants an end-to-end read and should be archived for future reference. Your company cannot afford to be uncompetitive in this tough market which means that Procurement must deliver the most competitive prices for purchased goods and services. World class negotiation skills will help you to do that.
This article originally appeared in E-Sourcing Forum (http://www.esourcingforum.com/archives/2009/07/14/building-negotiation-strength/)
Mark Trowbridge from Strategic Procurement Solutions recently penned an article for the Supply Chain Management Review entitled “Seven Ways to Build Your Negotiating Strength”. This is one of the best I’ve read on this topic. In particular, Mark discusses how to avoid situations that weaken your negotiating position. A number of these have to do with getting internal alignment regarding the negotiation. All company members who interface with the supplier must have the same objective and speak with one voice.The article then goes on to suggest seven ways to strengthen your position. These actions include:
1. Involve Supply Management Early and Often
2. Differentiate Between Competitive and Collaborative Negotiations
3. Prepare the Team to Fight the Tough Battles
4. Empower Negotiations through Factual Data
5. Negotiate all TCO Elements Before Entering Relationship
6. Shift the Supplier’s Paradigm
7. Leverage the Buyer’s Performance
This excellent article warrants an end-to-end read and should be archived for future reference. Your company cannot afford to be uncompetitive in this tough market which means that Procurement must deliver the most competitive prices for purchased goods and services. World class negotiation skills will help you to do that.
This article originally appeared in E-Sourcing Forum (http://www.esourcingforum.com/archives/2009/07/14/building-negotiation-strength/)
Wednesday, May 20, 2009
Spend Analysis vs ERP
Aberdeen Group recently published an updated report entitled: “Spend Analysis: Pulling Back the Covers on Savings” (October 2008). Consistent with their August 2007 report, the opportunity for those using spend analysis is impressive! Specifically, enterprises implementing spend analysis have been able to:
- Drive 25% more spend under management;
- Achieve a 5% to 20% cost savings for each new dollar of spend brought under management;
- Realize 67% higher savings on their spend;
- Achieve 11% higher contract compliance.
With results like these, it’s puzzling why organizations resist implementing spend analysis. One of the most common reasons offered is: “We don’t need a separate spend analysis solution. We already have an ERP system for spend analysis.” This argument typically comes from those who either haven’t tried to use their ERP system for spend analysis, or for those who are just unaware of the inefficiencies and ineffectiveness of this approach. They don’t know what they don’t know!
There are numerous benefits to a stand-alone, best-in-breed spend analysis solution.
1. Completeness – An ERP system may not contain all of your spend data. Often a company has multiple ERP systems which makes it difficult to consolidate spend data. Even when there is a single ERP system, it may not contain all spend (e.g. Corporate Travel Card, P-card, Contract Manufacturers, etc.). Or, a company may spend years getting to a single ERP system only to make an acquisition and find themselves with spend outside their visibility. Best-of-breed spend analysis solutions allow for the easy consolidation of data from disparate systems and conveniently accommodate changes in the business. This coherent view of all spend drives impressive savings!
2. Cleansing – ERP systems contain poor quality data which is difficult to correct and maintain. Brian Daniels, Partner at SpendRadar (www.SpendRadar.com), highlights a common fallacy. “The common misconception is that ERP data can simply be loaded into the data warehouse. Within the world of business intelligence “spend” data is unique in that it must be normalized and classified in order to make sense.” And, unfortunately, altering historical ERP data is sometimes forbidden because of accounting system connections. Even if allowed, it is difficult and time-consuming to correct Master Data and, once done, it will need to be re-done periodically. Conversely, a spend analysis solution provides an easy mechanism to correct data including things like misclassification, multiple supplier name variations and redundant items. These corrections are conveniently maintained as rules so that the same errors are corrected automatically with data refreshes.
3. Enrichment – ERP systems do not enrich the data. Enrichment provides information such as supplier ratings, contract performance, financial risk assessment, corporate parent/child relationships, supplier diversity status, etc. for compliance analysis and to aid in sourcing decisions. This information and its application to spend data cannot be done by within your ERP system. Spend Analysis solutions facilitate the grouping of suppliers into parent/child relationships, and the mapping feature automatically maintains corrections and groupings as data is refreshed. Aberdeen’s 2008 Spend Analysis report determined that Best-in-Class companies are 1.6 times more likely to utilize fully automated data enrichment processes allowing them to achieve process efficiencies and superior savings from fact-based decisions.
4. Classification – ERP data is either unclassified, misclassified or classified at a level that is not useful for sourcing. Classification, if done at all, is at a high level and does not provide the granularity necessary for sourcing. ERP systems are slaves to the accounting process, with spends typically classified by General Ledger (GL) account, not in logical sourcing groups. GLs tell you "who" in the organization made the purchase, or who will consume it. As sourcing professionals, we don’t care that Temp Labor was used for a Marketing event. We want all the Temp Labor spend in one bucket for sourcing leverage. Net, G/L codes rarely work for sourcing purposes. Duncan Jones, Sr. Analyst at Forrester Research puts it well, ”It’s about taking a mass of unstructured data and making sense of it, not like business intelligence, which is generally adding up numbers.” As Rod True points out in his excellent article, “Sourcing Groups – What Are They, Why Are They So Valuable, and How Do You Create Them”: “Creating these detailed item sourcing groups provides the foundation for the optimal leverage being sought through Spend Analysis and Strategic Sourcing.”
ERP data comes from disparate systems and/or is entered by diverse individuals and locations potentially using a variety of classification schemata. Those entering the data are typically not sourcing experts, which nets a high level of misclassifications. Spend Radar’s Brian Daniels posits: “What percentage of spend is currently classified as ‘Miscellaneous’ or incorrectly classified altogether?”. He suggests that an ERP system requisitioner may not:
a) fully understand the coding structure,
b) have time to manually search for the right code, or
c) care about accuracy so designates the wrong code or the infamous “9999 – Miscellaneous” category.
Brian has seen upwards of 70% of spend classified as 9999 – Miscellaneous! The bottom line is that the ERP coding can rarely be trusted!
On the other hand, spend analysis solutions allow you to correct and transform data, making changes to groupings and hierarchies, and to create rules that automatically map data to a specified standard or custom category structure. This allows the data to flex as the organization and its needs change. Importantly, this capability is repeatable thus automating classification for all future data refreshes. According to Aberdeen’s report, Best-in-Class companies are 25% more likely to auto-classify their spend thereby realizing significant efficiencies.
5. Usability – ERP systems are not user-friendly. Because ERP systems are designed for a wide range of purposes and a wide variety of users, they tend to be complex, cumbersome and not very user-friendly. They contain a lot of data, but getting it out in a usable form is a monumental task! Spend analysis solutions are designed for a very specific purpose and for a targeted audience. These solutions are “best in breed” and do what they do easily and well without any integration required. Product enhancements don’t need to compete across a broad application as with ERP, so product enhancements and new functionality are added more frequently.
6. Access – ERP systems are controlled by IT and often require IT support which diminishes access and flexibility. IT serves multiple internal customers with conflicting priorities and, like many organizations today, has suffered staffing reductions. Unfortunately, in order to access ERP data you must often “get in the queue” and wait until a resource becomes available. Or perhaps you only want to run a simple report, but can’t because the magnitude of data crunching slows or risks bringing down the system! Most Purchasing organizations want to be as self-sufficient as possible. Spend Analysis solutions manipulate the data off-line. They also contain their own standard and custom reporting capabilities. This facilitates a clear understanding of the organization’s spend, a critical input for strategic sourcing activities. The ability to “slice and dice” spend data in a great variety of ways and drill down to the transaction level, combined with virtually unlimited reporting capability frees users from the tyranny of IT schedules and canned reports.
Spend analysis takes “dumb” data and transforms it into actionable spend intelligence. Effective spend analysis is imperative for strategic sourcing, and strategic sourcing is increasingly important to business survival. This reality has elevated the strategic role of the procurement organization. According to the Aberdeen’s 2007 Spend Analysis study: “Top-performing enterprises effectively administer a spend analysis program by employing technologies that automate multiple facets of the spend analysis process, and enable organizations to more effectively leverage their procurement teams to manage more enterprise spend.” To be a top company in today’s economic climate we must equip our sourcing professionals with the best tool available allowing them to do their jobs most efficiently and effectively.
Still not convinced that spend analysis is superior to your ERP system? Why not do a “proof of concept” utilizing Paladin’s spend analysis as-a-service? This will allow you to test the value of the solution and the process for a nominal fee and with little disruption to your organization. Paladin Associates even offers spend analysis “free” when done in conjunction with a sourcing initiative performed on a gain sharing basis.
For additional information on this topic, we encourage you to consult the E-Sourcing Forum article: “Data, data, everywhere”, and the following write-up on the e-Sourcing Wiki: “ERP Inadequacies”.
This article was originally published in CheckMate News:
http://www.paladinassociatesinc.com/checkmate_vol_2_edition_2.htm
- Drive 25% more spend under management;
- Achieve a 5% to 20% cost savings for each new dollar of spend brought under management;
- Realize 67% higher savings on their spend;
- Achieve 11% higher contract compliance.
With results like these, it’s puzzling why organizations resist implementing spend analysis. One of the most common reasons offered is: “We don’t need a separate spend analysis solution. We already have an ERP system for spend analysis.” This argument typically comes from those who either haven’t tried to use their ERP system for spend analysis, or for those who are just unaware of the inefficiencies and ineffectiveness of this approach. They don’t know what they don’t know!
There are numerous benefits to a stand-alone, best-in-breed spend analysis solution.
1. Completeness – An ERP system may not contain all of your spend data. Often a company has multiple ERP systems which makes it difficult to consolidate spend data. Even when there is a single ERP system, it may not contain all spend (e.g. Corporate Travel Card, P-card, Contract Manufacturers, etc.). Or, a company may spend years getting to a single ERP system only to make an acquisition and find themselves with spend outside their visibility. Best-of-breed spend analysis solutions allow for the easy consolidation of data from disparate systems and conveniently accommodate changes in the business. This coherent view of all spend drives impressive savings!
2. Cleansing – ERP systems contain poor quality data which is difficult to correct and maintain. Brian Daniels, Partner at SpendRadar (www.SpendRadar.com), highlights a common fallacy. “The common misconception is that ERP data can simply be loaded into the data warehouse. Within the world of business intelligence “spend” data is unique in that it must be normalized and classified in order to make sense.” And, unfortunately, altering historical ERP data is sometimes forbidden because of accounting system connections. Even if allowed, it is difficult and time-consuming to correct Master Data and, once done, it will need to be re-done periodically. Conversely, a spend analysis solution provides an easy mechanism to correct data including things like misclassification, multiple supplier name variations and redundant items. These corrections are conveniently maintained as rules so that the same errors are corrected automatically with data refreshes.
3. Enrichment – ERP systems do not enrich the data. Enrichment provides information such as supplier ratings, contract performance, financial risk assessment, corporate parent/child relationships, supplier diversity status, etc. for compliance analysis and to aid in sourcing decisions. This information and its application to spend data cannot be done by within your ERP system. Spend Analysis solutions facilitate the grouping of suppliers into parent/child relationships, and the mapping feature automatically maintains corrections and groupings as data is refreshed. Aberdeen’s 2008 Spend Analysis report determined that Best-in-Class companies are 1.6 times more likely to utilize fully automated data enrichment processes allowing them to achieve process efficiencies and superior savings from fact-based decisions.
4. Classification – ERP data is either unclassified, misclassified or classified at a level that is not useful for sourcing. Classification, if done at all, is at a high level and does not provide the granularity necessary for sourcing. ERP systems are slaves to the accounting process, with spends typically classified by General Ledger (GL) account, not in logical sourcing groups. GLs tell you "who" in the organization made the purchase, or who will consume it. As sourcing professionals, we don’t care that Temp Labor was used for a Marketing event. We want all the Temp Labor spend in one bucket for sourcing leverage. Net, G/L codes rarely work for sourcing purposes. Duncan Jones, Sr. Analyst at Forrester Research puts it well, ”It’s about taking a mass of unstructured data and making sense of it, not like business intelligence, which is generally adding up numbers.” As Rod True points out in his excellent article, “Sourcing Groups – What Are They, Why Are They So Valuable, and How Do You Create Them”: “Creating these detailed item sourcing groups provides the foundation for the optimal leverage being sought through Spend Analysis and Strategic Sourcing.”
ERP data comes from disparate systems and/or is entered by diverse individuals and locations potentially using a variety of classification schemata. Those entering the data are typically not sourcing experts, which nets a high level of misclassifications. Spend Radar’s Brian Daniels posits: “What percentage of spend is currently classified as ‘Miscellaneous’ or incorrectly classified altogether?”. He suggests that an ERP system requisitioner may not:
a) fully understand the coding structure,
b) have time to manually search for the right code, or
c) care about accuracy so designates the wrong code or the infamous “9999 – Miscellaneous” category.
Brian has seen upwards of 70% of spend classified as 9999 – Miscellaneous! The bottom line is that the ERP coding can rarely be trusted!
On the other hand, spend analysis solutions allow you to correct and transform data, making changes to groupings and hierarchies, and to create rules that automatically map data to a specified standard or custom category structure. This allows the data to flex as the organization and its needs change. Importantly, this capability is repeatable thus automating classification for all future data refreshes. According to Aberdeen’s report, Best-in-Class companies are 25% more likely to auto-classify their spend thereby realizing significant efficiencies.
5. Usability – ERP systems are not user-friendly. Because ERP systems are designed for a wide range of purposes and a wide variety of users, they tend to be complex, cumbersome and not very user-friendly. They contain a lot of data, but getting it out in a usable form is a monumental task! Spend analysis solutions are designed for a very specific purpose and for a targeted audience. These solutions are “best in breed” and do what they do easily and well without any integration required. Product enhancements don’t need to compete across a broad application as with ERP, so product enhancements and new functionality are added more frequently.
6. Access – ERP systems are controlled by IT and often require IT support which diminishes access and flexibility. IT serves multiple internal customers with conflicting priorities and, like many organizations today, has suffered staffing reductions. Unfortunately, in order to access ERP data you must often “get in the queue” and wait until a resource becomes available. Or perhaps you only want to run a simple report, but can’t because the magnitude of data crunching slows or risks bringing down the system! Most Purchasing organizations want to be as self-sufficient as possible. Spend Analysis solutions manipulate the data off-line. They also contain their own standard and custom reporting capabilities. This facilitates a clear understanding of the organization’s spend, a critical input for strategic sourcing activities. The ability to “slice and dice” spend data in a great variety of ways and drill down to the transaction level, combined with virtually unlimited reporting capability frees users from the tyranny of IT schedules and canned reports.
Spend analysis takes “dumb” data and transforms it into actionable spend intelligence. Effective spend analysis is imperative for strategic sourcing, and strategic sourcing is increasingly important to business survival. This reality has elevated the strategic role of the procurement organization. According to the Aberdeen’s 2007 Spend Analysis study: “Top-performing enterprises effectively administer a spend analysis program by employing technologies that automate multiple facets of the spend analysis process, and enable organizations to more effectively leverage their procurement teams to manage more enterprise spend.” To be a top company in today’s economic climate we must equip our sourcing professionals with the best tool available allowing them to do their jobs most efficiently and effectively.
Still not convinced that spend analysis is superior to your ERP system? Why not do a “proof of concept” utilizing Paladin’s spend analysis as-a-service? This will allow you to test the value of the solution and the process for a nominal fee and with little disruption to your organization. Paladin Associates even offers spend analysis “free” when done in conjunction with a sourcing initiative performed on a gain sharing basis.
For additional information on this topic, we encourage you to consult the E-Sourcing Forum article: “Data, data, everywhere”, and the following write-up on the e-Sourcing Wiki: “ERP Inadequacies”.
This article was originally published in CheckMate News:
http://www.paladinassociatesinc.com/checkmate_vol_2_edition_2.htm
Thursday, April 30, 2009
Take A Long Term View
I am a sourcing professional and my husband is a sales executive. This has made for some interesting dinner conversations over the last 30 years. I am currently working with a client on a sourcing event. The client’s sole source vendor (a distributor) has wisely placed significant “free” equipment on site which, of course, uses proprietary materials. The client doesn’t want to incur the significant switching costs nor the disruption to its operation by changing vendors. The requirements include other standard products which could easily be purchased elsewhere, but the client also wants a sole source. The distributor manages inventory for stock items on a kanban basis making the lives of the buyer and his internal customers very easy.
Over coffee, my husband acknowledged that this is a sales rep’s dream situation! The customer is “locked in” with high switching costs thereby eliminating competition. He further admitted that this situation would most likely result in higher than normal profit margins for the vendor. Conversely, this situation is a buyer’s nightmare! How does one realistically introduce competition given the circumstances? A couple of possibilities come to mind. First, we can potentially create competition among various distributors who can supply the same equipment and proprietary materials as well as the standard items. However, that could require changing out the equipment, and it remains to be seen whether the distributors will bid against one another. Another option is to take the proprietary materials off the table and bid out the remaining standard products. However, this would violate the sole source objective, and one should only pursue this if there is a sincere willingness to split the business assuming the savings justify. Bluffing with potential bidders will only damage any long term potential for competition.
It’s unclear at this point which option we’ll take. Bidding the non-proprietary products will potentially allow the client to see the premium he’s paying for the standard supplies in order to maintain a sole source. The risk, however, is that the incumbent distributor will subsidize pricing on the stock items to maintain this business and make his profit on the proprietary products. Not an ideal situation.
As sourcing professionals, our best approach is to avoid these situations to begin with. We need to help our internal customers understand that there is no such thing as “free”. We need to look at not only the short term savings for “freebies”, but also consider the long term effect on competition and the resulting impact on pricing. Without competition, we’ll never know the true cost for the “free” equipment.
Originally posted on E-Sourcing Forum: http://www.esourcingforum.com/archives/2009/04/30/take-a-long-term-view/
Over coffee, my husband acknowledged that this is a sales rep’s dream situation! The customer is “locked in” with high switching costs thereby eliminating competition. He further admitted that this situation would most likely result in higher than normal profit margins for the vendor. Conversely, this situation is a buyer’s nightmare! How does one realistically introduce competition given the circumstances? A couple of possibilities come to mind. First, we can potentially create competition among various distributors who can supply the same equipment and proprietary materials as well as the standard items. However, that could require changing out the equipment, and it remains to be seen whether the distributors will bid against one another. Another option is to take the proprietary materials off the table and bid out the remaining standard products. However, this would violate the sole source objective, and one should only pursue this if there is a sincere willingness to split the business assuming the savings justify. Bluffing with potential bidders will only damage any long term potential for competition.
It’s unclear at this point which option we’ll take. Bidding the non-proprietary products will potentially allow the client to see the premium he’s paying for the standard supplies in order to maintain a sole source. The risk, however, is that the incumbent distributor will subsidize pricing on the stock items to maintain this business and make his profit on the proprietary products. Not an ideal situation.
As sourcing professionals, our best approach is to avoid these situations to begin with. We need to help our internal customers understand that there is no such thing as “free”. We need to look at not only the short term savings for “freebies”, but also consider the long term effect on competition and the resulting impact on pricing. Without competition, we’ll never know the true cost for the “free” equipment.
Originally posted on E-Sourcing Forum: http://www.esourcingforum.com/archives/2009/04/30/take-a-long-term-view/
Saturday, April 18, 2009
The Demise of Strategic Sourcing
In a recent Supply & Demand Chain Executive article entitled “Sourcing Prediction: Why the Future of Spend Management Won’t Include Its Most Familiar Component”, David Clevenger, VP at Corporate United, predicts the demise of strategic sourcing. He believes that strategic sourcing has run its course because the “piece-price savings aspect of nearly everything a company procures has been exhausted” and “low-hanging fruit has been harvested several times over”. This statement reminds me of the US Patent Office Commissioner’s declaration in 1899 that “Everything that can be invented has been invented.” Clevenger goes on to argue that the future of spend management lies in “advanced supplier and contract management, combined with sophisticated supplier development and analytics to identify and quantify new generations of savings to buying organizations.” He advises spend managers to pursue “real, productive and lasting relationships with suppliers.”
I am completely in favor of supplier relationship and contract management. However, I have several issues with Mr. Clevenger’s prediction. First, he assumes there is an absolute floor to prices. That is obviously not true as we have seen with electronics prices over the last several decades. His position assumes market forces have no impact on pricing and that there are no process or other efficiencies that result in supplier savings. With all due respect, I also think Mr. Clevenger missed the concept of “strategic” in strategic sourcing. The type of supplier partnership he describes is appropriate in certain circumstances where few options exist and there is mutual dependency between the buyer and supplier. However, there are many more situations where competition will deliver the best value (price, quality, service, etc.) to the buyer. On a personal level, do you think a “partnership” with your wireless provider or local car dealer will deliver the best results? I think not!
As sourcing professionals, we need to examine each situation and determine what is the right strategy, then do the appropriate research to assess and source best value. Where supplier partnerships are appropriate, we should pursue them with excellence. However, there remain many circumstances where a competitive approach makes sense. I predict that strategic sourcing, including competitive bidding, will be around for a long time to come. With deference to Mark Twain, the reports of its death are greatly exaggerated!
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on SpendMatters.com http://www.spendmatters.com/index.cfm/2009/4/17/Friday-Guest-Rant-The-Demise-of-Strategic-Sourcing
I am completely in favor of supplier relationship and contract management. However, I have several issues with Mr. Clevenger’s prediction. First, he assumes there is an absolute floor to prices. That is obviously not true as we have seen with electronics prices over the last several decades. His position assumes market forces have no impact on pricing and that there are no process or other efficiencies that result in supplier savings. With all due respect, I also think Mr. Clevenger missed the concept of “strategic” in strategic sourcing. The type of supplier partnership he describes is appropriate in certain circumstances where few options exist and there is mutual dependency between the buyer and supplier. However, there are many more situations where competition will deliver the best value (price, quality, service, etc.) to the buyer. On a personal level, do you think a “partnership” with your wireless provider or local car dealer will deliver the best results? I think not!
As sourcing professionals, we need to examine each situation and determine what is the right strategy, then do the appropriate research to assess and source best value. Where supplier partnerships are appropriate, we should pursue them with excellence. However, there remain many circumstances where a competitive approach makes sense. I predict that strategic sourcing, including competitive bidding, will be around for a long time to come. With deference to Mark Twain, the reports of its death are greatly exaggerated!
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on SpendMatters.com http://www.spendmatters.com/index.cfm/2009/4/17/Friday-Guest-Rant-The-Demise-of-Strategic-Sourcing
Carpe Diem!
In today’s economic climate, most companies are under tremendous pressure to reduce costs and improve profitability. Targeting cost reduction from purchased goods and services is a wise choice since every dollar saved goes directly to bottom line profit. Now is the time to move aggressively with these efforts as many markets have switched from Sellers’ markets to Buyers’ markets presenting tremendous opportunities for sourcing initiatives to reduce costs. Carpe diem! Seize the day!
Unfortunately, in-house sourcing organizations are already stretched to the limit leaving numerous untapped opportunities. Many purchasing organizations have cut staff, and further reductions may be underway. There are no budget dollars to hire additional sourcing staff nor to bring in external consultants to reap the benefits these market conditions present.
What is the business justification to address this dilemma? According to Aberdeen*, the average company has only between 51% and 90% of spend under management, and every new dollar brought under management nets a 5-20% cost reduction. Let’s assume your company is better than average with 80% of spend under management. That means 20% of spend is unmanaged. For every $10 million spent on purchased goods and services that leaves $2 million unmanaged. Since every new dollar brought under management nets a 5-20% savings, the $2 million of newly managed spend would deliver $100,000 and $400,000 in savings and bottom line profit! Assuming your company’s profit margin is 20%, you would need to increase revenue by $500,000 to $2 million to realize the same profit improvement. In other words, the opportunity is enormous!
Sourcing-as-as-Service using gain sharing can fill you resource gap with no upfront cost or risk thereby allowing you to seize these cost reduction/profit improvement opportunities. Paladin Associates and others offer this option. Since you need to move quickly, you’ll want to select a firm with seasoned professionals who can “hit the ground running”, and who employ the best processes and the latest technology. You’ll also want an organization with experience across a broad array of categories (both direct and indirect goods and services).
Not getting the support you need? Partner with your CFO. He or she can help you cut through the organization politics and sell the profit potential Sourcing-as-a-Service offers. Carpe diem! Seize the day!
Barb Ardell
Vice President
Paladin Associates, Inc.
* Aberdeen Group. Working Too Hard for the Money. August 2007.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/03/24/carpe-diem/
Unfortunately, in-house sourcing organizations are already stretched to the limit leaving numerous untapped opportunities. Many purchasing organizations have cut staff, and further reductions may be underway. There are no budget dollars to hire additional sourcing staff nor to bring in external consultants to reap the benefits these market conditions present.
What is the business justification to address this dilemma? According to Aberdeen*, the average company has only between 51% and 90% of spend under management, and every new dollar brought under management nets a 5-20% cost reduction. Let’s assume your company is better than average with 80% of spend under management. That means 20% of spend is unmanaged. For every $10 million spent on purchased goods and services that leaves $2 million unmanaged. Since every new dollar brought under management nets a 5-20% savings, the $2 million of newly managed spend would deliver $100,000 and $400,000 in savings and bottom line profit! Assuming your company’s profit margin is 20%, you would need to increase revenue by $500,000 to $2 million to realize the same profit improvement. In other words, the opportunity is enormous!
Sourcing-as-as-Service using gain sharing can fill you resource gap with no upfront cost or risk thereby allowing you to seize these cost reduction/profit improvement opportunities. Paladin Associates and others offer this option. Since you need to move quickly, you’ll want to select a firm with seasoned professionals who can “hit the ground running”, and who employ the best processes and the latest technology. You’ll also want an organization with experience across a broad array of categories (both direct and indirect goods and services).
Not getting the support you need? Partner with your CFO. He or she can help you cut through the organization politics and sell the profit potential Sourcing-as-a-Service offers. Carpe diem! Seize the day!
Barb Ardell
Vice President
Paladin Associates, Inc.
* Aberdeen Group. Working Too Hard for the Money. August 2007.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/03/24/carpe-diem/
Contract Wisely
The current economic downturn has transformed a number of industries from sellers’ to buyers’ markets. Corrugated is the poster child. Now is the time to lock in favorable pricing. But be wise as you contract. Those who are short-sighted may suffer the consequences as the market fluctuates, as it inevitably will.
Early last fall, corrugated buyers were lamenting an impending price hike. After acquiring Weyerhaeuser in August, International Paper announced a record high linerboard price hike effective October 1. According to Citi Investment Research analyst Chip Dillon, the increase was justified by July’s containerboard inventories being at their lowest level since 1980. Inventories had been depleted, in part, as a result of production losses attributable to Hurricanes Ike and Gustav which disrupted almost 5% of the nation’s monthly capacity.
How quickly things change! Within the space of a few weeks, large US financial institutions failed, credit dried up, the stock market crashed and demand for corrugated plummeted! Producers couldn’t stay ahead of the decline despite capacity being taken off-line faster than the current hot toy leaves shelves on Black Friday.
Bad news for the corrugated industry was good news for buyers. Weak box demand, reduced export shipments and intense competition from recycled-product drove containerboard mill operating rates to 72% of capacity in December, the lowest monthly level in several decades according to the American Forest and Paper Association. Despite significant capacity reductions from machine and mill shutdowns and extended holiday closings, supply still exceeded demand and linerboard prices tumbled. According to Paper Week, downward price pressure will be constant for at least first half of 2009.
It’s a buyers’ market for corrugated and many other products and services, and the perfect time to lock in favorable pricing! Anyone not under contract should be out in the marketplace using competition to capitalize on the situation. It is tempting in this market to use our leverage to squeeze out the last penny and to negotiate a one-sided contract. Be judicious, however. Many markets are cyclical meaning you may regret extreme actions as the market fluctuates.
Last fall, I talked with a colleague at the end of the second year of a three-year corrugated contract. The company had locked in pricing with semi-annual adjustments based on linerboard price index two months prior. Semi-annual protection seemed like a great advantage in the wake of linerboard prices which had escalated $215 a ton (over 50%) since the fall of 2005. Price protection delayed the negative impact of 2007 and 2008 linerboard increases. However, for my colleague it was now time to adjust prices for the remainder of the contract based on the announced record-high October linerboard index. Who could have anticipated that October’s price would be a peak? Locking in at that point, as the contract required, would leave their company in an extremely uncompetitive position in a hard-hit industry. The supplier, having eaten the linerboard increases for months in the past was not inclined to negotiate.
The lesson here is to anticipate inevitable market fluctuations. There is a tendency to think that prices will always increase. Real estate owners and mortgage lenders made this same mistake. For products with high feedstock costs like corrugated, plastic bottles, etc., neither you nor your suppliers can afford to be out of synch with market pricing for a prolonged period. Semi-annual or longer price protection where feedstock costs are significant leaves both the buyer and supplier at too great a risk. To avoid such risk, one could speculate that the supplier padded the original contract price in anticipation of linerboard increases. If that is the case, the buyer is now locked in at an unnecessarily high base price and a peak linerboard price as the market declines. It couldn’t come at a worse time for their business.
Quarterly or even monthly price protection provides a more moderate approach. There will be increased price volatility for sure, but there will also be substantially less risk to both parties. Yes, get the best price you can during negotiations, squeezing margins to favorable levels. However, you should also recognize that the supplier’s price will likely be more aggressive if you minimize the feedstock risk. Use more frequent price adjustments to maintain favorable margins over the life of the contract while mitigating risk as feedstock prices fluctuate. This approach avoids undue pain for either party.
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/02/23/contract-wisely/
Early last fall, corrugated buyers were lamenting an impending price hike. After acquiring Weyerhaeuser in August, International Paper announced a record high linerboard price hike effective October 1. According to Citi Investment Research analyst Chip Dillon, the increase was justified by July’s containerboard inventories being at their lowest level since 1980. Inventories had been depleted, in part, as a result of production losses attributable to Hurricanes Ike and Gustav which disrupted almost 5% of the nation’s monthly capacity.
How quickly things change! Within the space of a few weeks, large US financial institutions failed, credit dried up, the stock market crashed and demand for corrugated plummeted! Producers couldn’t stay ahead of the decline despite capacity being taken off-line faster than the current hot toy leaves shelves on Black Friday.
Bad news for the corrugated industry was good news for buyers. Weak box demand, reduced export shipments and intense competition from recycled-product drove containerboard mill operating rates to 72% of capacity in December, the lowest monthly level in several decades according to the American Forest and Paper Association. Despite significant capacity reductions from machine and mill shutdowns and extended holiday closings, supply still exceeded demand and linerboard prices tumbled. According to Paper Week, downward price pressure will be constant for at least first half of 2009.
It’s a buyers’ market for corrugated and many other products and services, and the perfect time to lock in favorable pricing! Anyone not under contract should be out in the marketplace using competition to capitalize on the situation. It is tempting in this market to use our leverage to squeeze out the last penny and to negotiate a one-sided contract. Be judicious, however. Many markets are cyclical meaning you may regret extreme actions as the market fluctuates.
Last fall, I talked with a colleague at the end of the second year of a three-year corrugated contract. The company had locked in pricing with semi-annual adjustments based on linerboard price index two months prior. Semi-annual protection seemed like a great advantage in the wake of linerboard prices which had escalated $215 a ton (over 50%) since the fall of 2005. Price protection delayed the negative impact of 2007 and 2008 linerboard increases. However, for my colleague it was now time to adjust prices for the remainder of the contract based on the announced record-high October linerboard index. Who could have anticipated that October’s price would be a peak? Locking in at that point, as the contract required, would leave their company in an extremely uncompetitive position in a hard-hit industry. The supplier, having eaten the linerboard increases for months in the past was not inclined to negotiate.
The lesson here is to anticipate inevitable market fluctuations. There is a tendency to think that prices will always increase. Real estate owners and mortgage lenders made this same mistake. For products with high feedstock costs like corrugated, plastic bottles, etc., neither you nor your suppliers can afford to be out of synch with market pricing for a prolonged period. Semi-annual or longer price protection where feedstock costs are significant leaves both the buyer and supplier at too great a risk. To avoid such risk, one could speculate that the supplier padded the original contract price in anticipation of linerboard increases. If that is the case, the buyer is now locked in at an unnecessarily high base price and a peak linerboard price as the market declines. It couldn’t come at a worse time for their business.
Quarterly or even monthly price protection provides a more moderate approach. There will be increased price volatility for sure, but there will also be substantially less risk to both parties. Yes, get the best price you can during negotiations, squeezing margins to favorable levels. However, you should also recognize that the supplier’s price will likely be more aggressive if you minimize the feedstock risk. Use more frequent price adjustments to maintain favorable margins over the life of the contract while mitigating risk as feedstock prices fluctuate. This approach avoids undue pain for either party.
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/02/23/contract-wisely/
Force Majuere
The current economic situation is challenging sourcing professionals in many ways. Force majeure is one issue that may present new challenges in today’s business environment.
The Yale Law Library describes force majeure as follows:
Force Majeure literally means "greater force". These clauses excuse a party from liability if some unforseen [sic] event beyond the control of that party [emphasis added] prevents it from performing its obligations under the contract. Typically, force majeure clauses cover natural disasters or other "Acts of God", war, or the failure of third parties--such as suppliers and subcontractors--to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party.
A sales colleague of mine lost his job recently when a customer invoked force majeure and walked from the contract. The customer’s industry has been hard hit by the economic downturn and they believed that constituted force majeure. The seller chose not to pursue the issue legally.
Might this clause also be applied on the buy side in today’s circumstances? One could easily envision a manufacturer unable to fulfill orders without the short-term credit necessary to purchase raw materials, leaving the buyer scrambling for substitutes without economic recourse. Could a buyer also use this clause to his/her advantage to avoid “take or pay” penalties when demand for a supplier’s product is reduced due to the economic crisis? Applicability would, of course, be dependent on the exact wording of the clause.
Donald Trump recently invoked force majeure to delay loan repayment on a Chicago condo development. “’Would you consider the biggest depression we have had in this country since 1929 to be such an event?’ he asked in an interview, adding, ‘A depression is not within the control of the borrower.’” The lender’s attorneys disagree calling this claim “laughable”. Obviously, there is no clear legal opinion.
My associate, Rob Patton, commented that the situation is not completely unprecedented. “I recall that force majeure was very much in vogue in 1973-74 during the first ‘oil shock’. Many suppliers used it to renege on supply commitments, put buyers on allocations, etc.”
As sourcing professionals strive to manage risk, we must take a broad view and consider the applicability of this common clause to the current economic situation. At the same time, we must recognize that contracts cannot anticipate every eventuality. This means that we must truly understand our strategic suppliers’ situations (including their supply chains). This will help us to take preventive actions where appropriate. However, we must also maintain constructive relationships with these suppliers so that when the unexpected occurs we can negotiate win-win solutions. As Rob Patton points out, “The legal side becomes very academic when you start shutting plants down for lack of supply. At that point who cares who wins legally ten years down the road!”
Have you encountered a claim of force majeure in the current economic downturn? If so, please share your experience with us. Opinions are also welcome.
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/01/21/force-majeure/
The Yale Law Library describes force majeure as follows:
Force Majeure literally means "greater force". These clauses excuse a party from liability if some unforseen [sic] event beyond the control of that party [emphasis added] prevents it from performing its obligations under the contract. Typically, force majeure clauses cover natural disasters or other "Acts of God", war, or the failure of third parties--such as suppliers and subcontractors--to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party.
A sales colleague of mine lost his job recently when a customer invoked force majeure and walked from the contract. The customer’s industry has been hard hit by the economic downturn and they believed that constituted force majeure. The seller chose not to pursue the issue legally.
Might this clause also be applied on the buy side in today’s circumstances? One could easily envision a manufacturer unable to fulfill orders without the short-term credit necessary to purchase raw materials, leaving the buyer scrambling for substitutes without economic recourse. Could a buyer also use this clause to his/her advantage to avoid “take or pay” penalties when demand for a supplier’s product is reduced due to the economic crisis? Applicability would, of course, be dependent on the exact wording of the clause.
Donald Trump recently invoked force majeure to delay loan repayment on a Chicago condo development. “’Would you consider the biggest depression we have had in this country since 1929 to be such an event?’ he asked in an interview, adding, ‘A depression is not within the control of the borrower.’” The lender’s attorneys disagree calling this claim “laughable”. Obviously, there is no clear legal opinion.
My associate, Rob Patton, commented that the situation is not completely unprecedented. “I recall that force majeure was very much in vogue in 1973-74 during the first ‘oil shock’. Many suppliers used it to renege on supply commitments, put buyers on allocations, etc.”
As sourcing professionals strive to manage risk, we must take a broad view and consider the applicability of this common clause to the current economic situation. At the same time, we must recognize that contracts cannot anticipate every eventuality. This means that we must truly understand our strategic suppliers’ situations (including their supply chains). This will help us to take preventive actions where appropriate. However, we must also maintain constructive relationships with these suppliers so that when the unexpected occurs we can negotiate win-win solutions. As Rob Patton points out, “The legal side becomes very academic when you start shutting plants down for lack of supply. At that point who cares who wins legally ten years down the road!”
Have you encountered a claim of force majeure in the current economic downturn? If so, please share your experience with us. Opinions are also welcome.
Barb Ardell
Vice President
Paladin Associates, Inc.
Originally posted on E-Sourcing Forum
http://www.esourcingforum.com/archives/2009/01/21/force-majeure/
Saturday, February 7, 2009
Auctions: How Many Bidders Do You Need?
How many bidders do you need for an electronic auction? There are a variety of “expert” opinions on this question. Is it three, four, five? I have heard all of these recommendations. The correct answer is: at least two. But the actual number depends.
I have experienced circumstances where two bidders were plenty. It was a buyers’ market. There was significant over capacity, and the two bidders were hungry. They fought for the business in a bidding war, and the auction delivered significant savings. Conversely, I have heard of events where there were three, four or five bidders with little competition. It was a sellers’ market with limited available capacity. The bidders were satisfied with their market share and unmotivated to bid aggressively. In this situation, an auction might deliver little, if any, savings and sometimes even result in a premium!
A competitive market assessment is the key to determining the “right” number of bidders. This is best achieved by first doing an RFP where you collect preliminary pricing. (I always tell the prospective bidders to submit feasibility level pricing. However, I also state that I reserve the right to award based on these bids. That keeps the proposals serious.) The RFP responses allow the buyer to assess the degree of competition for all items in a sourcing event. You may have three potential bidders, but if the incumbent is low bidder at your current price and the other two aren’t even in the ball park, you will be hard pressed to achieve a savings. I encountered this situation while coaching an event for injection molded parts. After the RFP, we determined there was insufficient competition among the three potential bidders to proceed with an auction. Instead, we identified additional sources and collected preliminary pricing from them. Although this delayed our award by a few weeks, we ended up with a successful auction delivering a 10% savings. It was well worth the wait!
There is no magic number. You need at least two bidders and, most importantly, you need a number that will provide sufficient competition given current market conditions. This will vary from commodity to commodity and from year to year. The buyer should always assess the current market conditions and verify that there is sufficient competition before proceeding with an auction.
Barb Ardell
Vice President
Paladin Associates Inc.
Originally published on E-Sourcing Forum
http://www.esourcingforum.com/archives/2008/12/22/auctions-how-many-bidders-do-you-need/
I have experienced circumstances where two bidders were plenty. It was a buyers’ market. There was significant over capacity, and the two bidders were hungry. They fought for the business in a bidding war, and the auction delivered significant savings. Conversely, I have heard of events where there were three, four or five bidders with little competition. It was a sellers’ market with limited available capacity. The bidders were satisfied with their market share and unmotivated to bid aggressively. In this situation, an auction might deliver little, if any, savings and sometimes even result in a premium!
A competitive market assessment is the key to determining the “right” number of bidders. This is best achieved by first doing an RFP where you collect preliminary pricing. (I always tell the prospective bidders to submit feasibility level pricing. However, I also state that I reserve the right to award based on these bids. That keeps the proposals serious.) The RFP responses allow the buyer to assess the degree of competition for all items in a sourcing event. You may have three potential bidders, but if the incumbent is low bidder at your current price and the other two aren’t even in the ball park, you will be hard pressed to achieve a savings. I encountered this situation while coaching an event for injection molded parts. After the RFP, we determined there was insufficient competition among the three potential bidders to proceed with an auction. Instead, we identified additional sources and collected preliminary pricing from them. Although this delayed our award by a few weeks, we ended up with a successful auction delivering a 10% savings. It was well worth the wait!
There is no magic number. You need at least two bidders and, most importantly, you need a number that will provide sufficient competition given current market conditions. This will vary from commodity to commodity and from year to year. The buyer should always assess the current market conditions and verify that there is sufficient competition before proceeding with an auction.
Barb Ardell
Vice President
Paladin Associates Inc.
Originally published on E-Sourcing Forum
http://www.esourcingforum.com/archives/2008/12/22/auctions-how-many-bidders-do-you-need/
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