The Strategic Sourceror

Welcome to the Strategic Sourceror Blog. Dedicated to providing CEOs, CIOs, CPOs and Procurement Professionals with current business information, trends, procurement tips, industry news, cost-cutting techniques, and strategic sourcing best practices.

 
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Are You A Gambler?
Wednesday, June 11, 2008
Taking risk can be exciting. The rush of adrenaline and the thrill of winning gets more intense as the risk goes up. Or perhaps, the stress and anxiety increase and you have no fun at all. When it comes to your supply chain, are you a gambler?

Most companies have no formal risk assessment methodology or processes to mitigate risk in their supply chains. Many executives will agree that risk in their supply chain has increased in recent years, but few are taking any definitive action. Why? Are there a lot of gamblers in corporate America?

Quite often the attitude is "if it ain't broke, don't fix it". A lack of resources and short term goals force executives to focus on day to day operations and leaves little time for long range planning. Not knowing or not looking is equivalent to sticking your head in the sand. Your exposure may be far greater than you realize. Do you know where your suppliers get their raw materials and components from? What about your suppliers' suppliers? Are any of your suppliers having financial difficulty? Could they go out of business? What would a failure in your supply chain cost you?

Supply chain failure costs are far greater than most people realize. The impacts can be financial, loss of a key customer or customers, damage to company reputation, loss of competitive edge etc. Depending upon the degree of failure, the list can go on and on and my even result in the failure of the entire enterprise.

What can you do to reduce supply chain risk? Any plan should include the following elements: identify risks, develop strategy to mitigate risk, implement and monitor. Future posts will discuss each of these elements in more depth.

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posted by Steve Belli @ 2:21 PM   0 comments
Self Contained Purchasing Department, hold the Strategic Sourcing?
A recent “Talkback” article on Purchasing.com caught my attention. Hilton Hotels' purchasing organization says "The bucks start here". In quick summary, the article explains how Hilton Hotel’s purchasing department is in fact a profit center for the business.
Although it is impressive what Hilton has opted to do in order to maintain their own purchasing and supply chain departments as a cost-neutral entity, I had to read the article carefully to really understand what they were saying. I would argue that the article (or Hilton) is a bit liberal in defining what they call their “purchasing department” as it includes a marketing department and its own finance department. It is in fact, a self contained consulting firm or outsourced purchasing company.
Looking at the numbers, Hilton is managing $2 Billion in annual spend, with 147 people. That works out to just $13.6 million of managed spend per person, and only has an annual impact on the corporations spend of about 1% in savings. By using the numbers that they published in this article, I calculate only a $145k annual cost savings per purchasing department employee, or as high as 180k/person if you factor in their revenue. Also, keep in mind, these numbers simply talked about savings and revenue, and did not account for any overhead costs. With what Hilton is doing, I would expect there are some significant annual software licenses and infrastructure costs that need to be accounted for, which could drastically reduce these numbers.
The numbers indicate that while Hilton is maintaining a cost-neutral procurement center, they probably are not very focused on the actual strategic sourcing. I am sure that a large portion of the staff is dedicated to maintaining contracts, collecting fees, marketing, and managing finance, and can’t help but wonder how much resource is actually left over for the actual strategic sourcing aspect of procurement. Although I commend Hilton for the team that they have built and the obvious success they have achieved, I believe Hilton could still benefit greatly by supplementing their strategic sourcing resources with the outside consulting world.

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posted by William Dorn @ 9:46 AM   0 comments
Strategic Sourcing Used in Chauffeured Services
Tuesday, June 10, 2008
A recent article on Business Travel News Online discusses the new levels of creativity that Chauffeured Services organizations are now forced to take in order to keep costs down and profitability up in the world of $140+ barrel oil.

In reality, most of the concepts that are being employed to keep fleet costs down are nothing special. Companies are now focusing on making sure that vehicles are not idling, and that tires are properly inflated (with Nitrogen in some cases). But these are not really creative ideas, a quick search for “ways to increase your mpg” in any major search engine and you will find hundreds of results telling you to do the same things.

One thing that is creative and is now becoming more common in the transportation industry is to employ trainers to teach their drivers effective driving and ways to consume less fuel. While the ideas, if implemented properly will almost certainly gain a small measurable savings in the fuel costs for chauffeured services organizations, I doubt the intention is to actually pass along the savings to the customer (as the article indicates), but rather to protect profitability.

Dav El's CEO, Scott Solombrino, says "You're seeing a lot more strategic sourcing and procurement departments than I've seen in my 31 years in the industry," Solombrino added. "It's helped consolidate the business because procurement seems to be able to get policies enforced."

I agree with Mr. Solombrino, we are seeing a lot more “Strategic Sourcing Managers” in just about every industry we go into, especially in the last 18 months. And we also agree that it seems, in some measure, that procurement departments are now doing a better job of getting policies enforced, however we also see unreasonable expectations set on a lot of these procurement managers, so I suspect they are just working harder to ensure the policies are enforced that they ever have been before.

The BTNOnline article continues to talk about more and more organizations are now going through formal RFP processes for contracting with Chauffeured Services organizations, and that there are a lot more questions today than there ever has been.

It is good that strategic sourcing managers are starting to understand the cost components of this type of spend, but I wonder how many of these organization still believe that Strategic Sourcing is the processes of writing a RFP and getting three vendors to bid... I would suspect that it is still the most common practice in most organizations and that many organizations are missing out in developing truly creative collaborative solutions with their suppliers because they simply throw out a RFP document for a bid.

If your organization wants to go beyond the “Three Bid RFP” process, contact Source One for assistance.

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posted by William Dorn @ 9:04 AM   0 comments
Comments on a Recent Sourcing Innovation Post
Wednesday, June 4, 2008

Thanks yet again to the doctor for covering some news in the sourcing front with his piece ThomasNet Takes Sourcing to the Masses.

I think the doctor yet again hit the nail on the head with his understanding of this particular offering. For those of those that have not read the press release, Source One and ThomasNet have recently partnered in order to provide basic e-sourcing tools to the procurement and supply community. These tools currently offer basic RFX management as well as Reverse Auction tools for free to both buyers and suppliers.

Anyhow, I was going to leave some comments over there, but realized that this would be a bit of a lengthy rant, so decided to post it here.

The criticism, resistance and negativity that certain members of the procurement solutions provider community continue to comment on about tools such as www.WhyAbe.com and now ThomasNet should not surprise me. In fact, I actually find some relief in the amount of interest these business models are generating, because I detect a certain level of fear from some providers.

When we first launched WhyAbe we were told by many individuals and “industry experts” that we would put ourselves out of business and that there would be no way we could afford to maintain the tools for free. Here we are approaching our third year of success, and not only is our community stronger than ever, but we have many more rounds of releases in the works. The feedback from users of the tools have been overwhelmingly positive while the feedback from people that sell their own solutions has been overwhelmingly negative. And Source One, as a company is stronger and more recognized than ever before.

As Jason Busch commented over on Sourcing Innovation, perhaps ThomasNet is a little late to the game in providing these types of solutions to their user base. However, I have to disagree on rest of your points Jason. To think that ThomasNet missed the online sourcing boat altogether is completely incorrect. Not just to quote the major analyst firms (since many readers hate them), but our own experience with the end user community tells us that less than 10% of all companies have any type of e-sourcing system at all. If my math is correct, that means that the market is open to over 90% of worldwide companies (of all sizes) for various types of e-sourcing solutions. Perhaps, as I blogged before, that is why there seems to be dozens of new competitors in the market space.

Even if the market was flooded, to think that a creative solution could not disrupt the status quo would be a mistake. Anyone heard of MySpace? They were not first to market, and did not even have a unique idea. Facebook anyone? Some would argue they should not have even attempted to start-up because MySpace dominated the market. My point is, even though you can come late to the game with a product or service, there can always be a big spot for you in it, with just a bit of creativity.


Now let me get to some of Alan Buxton’s comments. First off, let’s look at what Alan termed as “utilization” of WhyAbe. Alan specifically looked at some recent “Public” RFX events that have been conducted on WhyAbe and assumed that this was a reflection of the adoption and utilization of the site. In fact, the mass majority of all events conducted on the site are held privately, and cannot ever be seen unless you were specifically invited by a buyer. Most companies are simply not comfortable with “open” or “public” events.

We have one organization in particular that has on average 3-5 successful events per week and has been conducting them for over the last year and a half. In fact, that particular organization completely abandoned a very well known major sourcing application in order to adopt WhyAbe.

Secondly, Alan indicates that there is a lack of suppliers for a particular commodity that he searched in. This is not proof that there is no utilization of the site, it simply indicates that there is weak supplier registrations in a particular commodity. In fact, one of the main motivations of striking the ThomasNet deal was to build a toolset jointly that can tap into their massive database of suppliers. But even if we had every supplier listed in the world, having a big database does not substitute proper strategic sourcing processes and supplier relationships. Most of the users at WhyAbe tend to invite their own suppliers after they have been qualified anyhow. WhyAbe was never originally intended to be a supplier identification tool.

To answer Alan’s questions as why RFX tools are better than email/outlook. I could name many reasons, but just to look at a few:

  • The ability to add coworkers as reviewers (without sharing your inbox or forwarding every response)
  • The ability to automatically relist an event and run it again in the future
  • Certain compliance with internal or external policies
  • Avoiding the “oops” of sending responding to a question or forwarding a document to the wrong supplier
  • and both sets of tools support Reverse Auctions (which cannot be done in email)

And as per the comment “You don't need to read a 60 page manual to send an email.“ My site analytics show me that less than one half of a percent of all users have even ever clicked on the manual. The tools were developed specifically so that users can hop right on and start using them, without any implementation or training. In fact, we only wrote the manuals because one customer specifically required them in order to adopt the toolset.

Do the “masses” want this tool or any tool? That remains to be seen. But considering that WhyAbe has held hundreds of events and ThomasNet, brand new, has already held dozens of events, I would think it is clear that many users want some type of tool.

Also, thank you Eric Strovink for backing us up on the “pay to play” model that Charles Dominick suggested we may have participated in. I can definitely see why Charles said what he said, because I absolutely believe it to be true that you have to pay to play with most of the analyst firms. However, we have never contributed a dime to Gartner, they found us. Source One has been around for 16 years, way before most solution providers were even conceived, and WhyAbe has been around for almost three years, this past January was the first time that Gartner had ever even heard of us, so it is a long lengthy process to get noticed, if you are not investing millions into marketing (like almost everyone else is).

To wrap up this lengthy post (or rant), let me say a few things. Source One, WhyAbe.com, and ThomasNet are here to challenge the “traditional” model of e-sourcing solutions and procurement services in general. We are not surprised, but rather flattered, that other providers are attempting to find reasons why our models will not work, when clearly there is a market for them.

I think the doctor completely understands what we are doing, as he writes “Then, when an organization has identified it's needs, and, more importantly, identified what it can do well in house - and what it can not, it can always upgrade to a more extensive e-Sourcing platform and retain a PSP, like Source One, to help it with those categories that it doesn't have the experience, or the leverage, to get savings on.” I could not have said it any better myself. Source One is doing very well with providing Strategic Sourcing Resources to our customers. And we do not intend to compete with robust full-service procurement systems. We offer basic tools for basic needs.

As a shameless plug, here is something for “competing” service providers to consider. WhyAbe.com recently announced sponsorship opportunities on its site. Rather than criticize the tools, we welcome a full-service technology provider to advertise with us, and have the opportunity to show first-time procurement tools adopters what they are missing in the world of procurement and spend management technology.

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posted by William Dorn @ 2:55 PM   0 comments
Where are the Low Cost Countries?
Tuesday, June 3, 2008
We receive a lot of inbound calls asking for low cost country sourcing help. The requests have one similarity this year. Everyone wants out of China. The calls go as follows: We have been manufacturing our product in China for 5+ years and costs are rising. We want to investigate other low cost countries that may be more competitive. Sometimes the calls focus on reduced risk - we don't want to have all of our eggs in one basket and we don't have the resources to investigate other potential countries ourselves.

Rising labor costs, falling dollar, earthquakes, intellectual property violations, Olympic Games commerce disruptions etc. are making companies re-evaluate the China risk / reward scenario. Companies want to know where to go to remain competitive and to reduce single country sourcing risk. It is easy to identify potential candidates - Vietnam, South Korea, Taiwan, Malaysia, Eastern Europe, Africa, South America ....... Which countries are right for you?

The low cost country selection process starts with the product that you are trying to produce. Are the raw materials available? Can you find a reliable supplier with the capability to meet your specifications? Are certifications needed? Are there export / import restrictions? There are many more issues that need to be investigated just to short list a supplier before beginning sample production. Many companies are looking at the in country market for their product as one way to mitigate some of the risk.

It is helpful to have in country experts that can help you to navigate the local legal, political, cultural and logistic landscape. At Source One, we have built a global network of in country partners that can ease the difficulties associated with supplier identification and qualification. After review of your requirements, we can help identify the best low cost countries to target for alternate sources of supply. With the rapid shifts in global markets, you don't have to do all of the heavy lifting.

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posted by Steve Belli @ 11:07 AM   0 comments
SEC mandates XBRL
The Securities and Exchange Commission voted this past May to propose requiring U.S. public companies to file their financial reports with Extensible Business Reporting Language (XBRL). Read about it.

If this proposal goes though, it would mean that traditional financial statements and documents would have to be tagged with XBRL identifiers. In essence, financial statements will become easily searchable, comparable and interactive.

“This is all about bringing investors better, faster, more meaningful information about the companies they own," SEC Chairman Christopher Cox said in a statement. While targeted at investors, the actual application of XBRL means formatting financial documents to be more easily searchable, and will lend itself to reorganized databases that can be easily downloaded into spreadsheets and applications and will provide many practical comparative and analytical uses.

I suggest that spend management technology providers should be following this closely, as it can lend to very practical integration into existing software solutions. The first one that comes to mind is the D&B Application, since they already have a massive database of public organizations. While the XBRL tagging of SEC filings in itself does little for the procurement professional, it will provide an easy way to match suppliers and potential vendors within software solutions, to provide quick and easy reporting and qualifications on a company’s financial viability.

The proposal, if approved, suggests that it will first mandate the XBRL reporting based on company size, with an eventual goal of tagging all public company’s financial statements. It will be interesting to see which providers, if any, are first to market with this type of reporting through spend management and spend analytics applications.

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posted by William Dorn @ 9:10 AM   0 comments
Metal Casting Reference Website Launched for Buyers and Engineers
Okay, I am a couple of weeks late reporting this news, but a new website, http://www.metalcastingdesign.com has been jointly launched by Engineered Casting Solutions (ECS) magazine and the American Foundry Society (AFS).

The new website is apparently a replacement for an older site, and promises to provide white papers, blogging, podcasts and tools to help engineers design castings. They also claim to provide information to buyer’s to help purchase castings.

When I get some time, I will review the site in more depth, but at first glance, one major piece that seems to be missing is the ability to download cad models for engineers. Of course the focus is more for custom designed castings, so I could see engineers turning to sites like ThomasNet.com to download their “standard” casting models.

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posted by William Dorn @ 8:12 AM   0 comments
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