Brrr.

Not being quite sufficiently frozen to the bone with -20c (-4 for those brave souls still stuck on Farenheit) at home, I'm heading off to the Winterpeg to experience -25c (-13F) for a couple of days. Feel free to keep the fires burning for me in here.

Cheers,

David

Making pretty

I've updated the look, and some of the content, on the Procurement Investor home page.

Here's the new look:








And the old look:

Still fighting the talent war

(No I don't know anything about this comic - but it has great cover art for this article on the talent war)

The topic of recruiting and retaining procurement “talent” is a perennial favourite. Here are a bunch of articles:

Here - European Leader Net

Here - European Leader Net
Here - Procurement Central

Here - Supply Excellence

Here - A comment on Jason Corsello's blog, which is comprised of links to articles on procurement talent!

and

Here - Shared Services BPO

It was top of mind during a discussion this week about estimating strategic sourcing savings. In short, for the situation under discussion, we had two options to consider. The first was to provide training and technology support to a group of corporate buyers. The second was to engage “world-class” consultants to do the strategic sourcing for the client. Should we estimate a difference in savings between the two options? The consensus answer was that we should expect higher savings if we use the consultants. If you accept that the world-class consultants are more “talented” than a group of corporate buyers it appears that we were betting on talent.

In my case, that’s not true. I was betting on market knowledge.

A quick digression. I use the concept of “Market Power” to indicate the ability to negotiate favourable supplier contracts. The more market power you have the better the deal you can negotiate. Several things can contribute to increasing your market power. In my experience the most powerful are:

* Purchasing Volume - the most common approach (not the best, merely the most common) to strategic sourcing is to aggregate as much of the company’s spend as possible into a single contract
* Compliance – the ability to shift demand within your company to your preferred suppliers (and to credibly communicate this ability to your suppliers)
* Market Knowledge – the amount of information you have on current market conditions and suppliers

As I discussed, here, many organizations both over-estimate the degree to which volume will drive better prices and also often fail to understand what are the price/volume economics for a particular good or service.

Your suppliers' view of your compliance management ability (not your internal view) will strongly impact your market power.

In my experience, market knowledge is the strongest contributor to market power. Knowing what others have recently paid for a good or service, what the production capacity or utilization rates (goods, services) a supplier and their industry are experiencing and can support, what T&C’s impose non-standard costs on a supplier, etc, do more to allow great contractual terms to be negotiated than simply adding and delivering volume to a supplier.

Back to the discussion on relative savings rates. I was betting that the consultants would have more market knowledge by the simple matter of their firm frequently going to market for their clients as opposed to the corporate buyers who generally would only go to market every few years.

It would be fashionable, often true, and egalitarian to also say that consultants are rarely more talented than corporate employees. I don’t believe that, I think good consultancies often have very talented people on staff. What I do believe is that reasonably competent people who are provided with the right tools to build market power will out-perform highly talented people without those tools.

This raises some interesting conclusions. First, if you're going to bring in sourcing consultants, make sure the ones who show up have access to their firms recent market experience, and don't assume just because they are from a well-known sourcing consultancy that that is true.

Second, if you are fighting the “talent wars” you must also consider the environment in which that talent will be deployed. Can you offer talent an environment where they can promise and deliver on compliance commitments to suppliers? Can you provide them with the information they will need to remain market knowledgeable?

If the answer to either of those questions is “no”, “maybe”, or “we hope the talent will bring that to us”, you maybe showing up to a gun fight with a knife – talent will migrate to where they can be successful and remain talented.

Cheers,

David Rotor

Wiki'd out

Earlier I posted that I had migrated to www.procurementinvestor.com and that I had some small ambitions for the new site. I was able to figure out how to get one piece working this week. The Procurement Investor Wiki is up and running.

A wiki is a website that allows collaborative editing of content. The Procurement Investor wiki focuses on procurement topics, and encourages readers to help to develop the content on these pages for our mutual use and benefit. The wiki is grouped into topics. The first topic is:

The Category Hierarchy - Defining a hierarchy of goods and services that are logical for procurement.

As it develops I'd like to add a topic on supplier pricing, supplier quality, and sample bid documents. As those sections develop I'll announce them in here.

Cheers,

David Rotor

$1B a day in cross-border shopping

This is the time of year that Fleet managers are thinking about their final purchases of the 2007 model year. They’ll continue to be paying a huge premium if they are on the northern side of the Canada-US border (except, of course, the funny inversion you get with Detroit being north of Windsor). Last summer Canadian Driver, published this article, suggesting that prices in Canada, normalized for such things as exchange rates and trim levels, are 17% higher for the same vehicle. As with any study like this the actual amount varied dramatically by vehicle, here’s a chart produced for their article, the source is credited on the image, but I can’t quite make it out.

The article normalized for currency exchange between January-July 2006. Here’s a look at the monthly average exchange rates between 1999 and 2006, from the Bank of Canada (and their currency exchange page).

This price differential across the Canada-US border is going to vary by category of good or service, but cross border economic activity is above $1B per day. If you’re not benefiting from exchange rate/price arbitrage, odds are good that your supplier is benefiting. As always, market knowledge can go a long way to evening the odds, so don't just look locally for price benchmarks; your suppliers view their markets globally, so should you.

Cheers,

David Rotor

Fuel surcharges, part deux

Tim Minahan, is picking up on the fuel surcharge issue. Thanks Tim.

Limits of Sourcing?

I've had a busy week. Apart from moving to a personally owned server, Procurement Investor, I've also been working on a large procurement outsourcing deal, the same one I wrote about here. And, I've been taking a look at some leads that are coming in from my post on looking to invest in procurement savings. I talked with some folks at Ariba on Monday, sharing some thoughts on delivering savings for our clients.

But the thing that's really caught my attention this week has been "how small is too small?". I've had the chance to look at some small companies this week, one that had only $5M in payables. It's not unusual to find a sourcing person who will claim that they routinely save 10+% on purchasing. We all, and I'll include myself here, always talk about how big a spend we've saved against. No one brags about how small a spend their expertise is effective against.

I'm intriqued, can strategic sourcing work for a $100M revenue company? How about a $10M revenue company?

If I find out, I'll let you know.

Cheers,

David Rotor

New foundation, same face

Over the weekend I "moved" to a new site Procurement Investor but through the magic of google nothing else has changed ... yet.

Oh and my email addy in here has changed as well. davidrotor "at" procurementinvestor.com

I plan a few enhancements for the site which necessitated having more than just blog space. If I can work it out, the first thing will be a wiki style category hierarchy. I currently use a three-tier approach for indirect of:

Family
Group
Category

Here's a picture of the first two levels. I'll announce in here once I figure out how to make it into a wiki.

Looking at data, big picture and little picture

I posted my thoughts on the future of expenditure analysis, moving from historical to real-time analysis and intervention into a transaction. But I also said I respect the typical data mining approach. Here’s an example of data mining that can really help to bring understanding to your clients, executives running other business units. Hat tip to David Bush, at E-sourcing forum, yesterday he led me to an article on micro and macro expenditure analysis from November on his site. Well worth reading for anyone thinking about how to understand buying patterns.

The article reminded me of a clever chart a team looking at PC spend put together to help client executives understand the strategy they were proposing. They had gathered data from about 50 departments, which let us understand a high level view of purchasing patterns.

(All data presented has been changed and “anonymized”)

I like to start to understand expenditure using a “macro” approach I call “5X4” reporting. 5 axis of data reported against each other:

1. Category of Spend
2. Supplier
3. General Ledger (GL) Code
4. Business Unit
5. Geographic Location

Here are two generic examples of 5X4 reports, the first has Category as the pivot and the second shows Supplier as the pivot. The others follow the same pattern, and you can sort the charts alphabetically, by $ amount, etc.

5X4 Category Spend

5X4 Supplier Spend

The quality of data will vary be organization and axis. I often find Geographic Location and Business Unit data are pretty sketchy.

When we looked at 5X4 data for PC spend we made some observations:

1. It was a big category of spend, tens of millions for PC’s alone
2. Spend was well consolidated to a handful of major suppliers.
3. There were noticeable differences in the macro benchmarks; Spend per employee, Square footage, and % of SG&A costs varied by department in ways that we couldn’t understand based on the type of work performed by those departments
4. There was the usual mis-coding of GL spend.

Nothing that jumped out at us to say we should make this a high priority category for sourcing.

Next we looked at the data (hundreds of thousands of lines of transaction data) using a standard stock chart from excel, “Volume:High:Low:Close”.
By department expenditure data these adjustments were made to the input definitions:

Volume = Total dollars spent
High = the highest price paid for a single PC
Low = the lowest price for a single PC
Close = the mean price for all PC’s purchased.

Here are a few of the questions we expected the chart would lead us to investigate:

1. Are large variances in low to high price due to a wide range in quality and specifications being purchased or a wide range in price being paid for the same quality and specification?
2. Does the departmental pricing look similar for departments with similar work and labour forces?
3. Is the volume of purchasing for similar departments also similar?
4. Would we see variances in the lowest and highest prices across departments? A large variance in the high price would be easier to understand than a large variance in the low price.

And some other observations we expected to make:

1. The lower the mean price was to the low price, the more units were being purchased at the low end of the price scale
2. A mean price in the middle of the price range indicated just as many high price units being purchased as low price units

Again, with the data changed, here what the chart looks like: The chart led us to look for answers in the full set of transaction data:

1. We found the wide price variance at “A” was equally due to a same unit price variances and to a wide variety of specifications being purchased. Given the size of the spend and what we also knew about the department, we were confident that PC buying was basically a “Free-for-all”.
2. Departments “B” and “C” were virtual clones. Same city, same type of work, same type of labour force. We expected similar purchasing behaviour and this data confirmed it. By cross-checking the macro data (5X4)’s though we observed that price per employee was more varied than we expected. It turned out that “B” generally kept PC in service for 4 years, and “C” for five years.
3. “D”, “E”, and “F” were a surprise. Again, pretty much clone departments with pretty different purchasing behaviours.
4. “I” was a revelation to the executive who ran the department, he had been in charge for over 10 years, ran an “analytical” department and confidently told us he had standardized PC purchases and had tight internal controls “best in the business”. One look at his chart and he immediately understood the data had proved otherwise. He was a good enough executive that he accepted and appreciated the data.

This analysis and the discussions that ensued with the business units were then directed into crafting a market strategy for purchasing PCs across the organization.

Cheers,

David Rotor

And ... Action!

The E-Sourcing Forum has a couple of interesting posts this week. This one discusses expenditure analysis, reviewing an article in European Leader in Procurement. Here’s a quote from E-Sourcing.

“As the author explains, the future of spend intelligence lies in dealing with historic data and system issues by enriching source data and providing flexible on-demand reporting for all aspects of P2P.”

I agree in the value of expenditure analysis, in 2006 I led a team that needed to understand $20 billion in purchasing across over 100 organizations. It will come as no surprise to anyone in procurement that among the very first things we did was start grabbing data to build an expenditure database, and then started mining that database to understand both micro and macro purchasing behaviours.

So when I say I don’t entirely agree with author that the future lies in historic data, it is with respect for the thought process and outcomes he is driving towards. My belief is that the future of spend intelligence, and really in the procurement function is to move from a passive role to that of an active participant in procurement transactions.

Much has been and will continue to be written about the sometimes desire and sometimes success of the procurement function to move from being a transaction processing function to being a strategic business partner. What that means to me is that procurement needs to take an active role in deciding when and how a firm spends money and other resources. Procurement teams can and should be able to contribute to corporate risk management discussions, not simply supply risk mitigation. Procurement needs to view their function as a market, and execute strategies and plans to capture larger and more “profitable” market shares.

When one then considers the future of expenditure analysis, we should start by understanding that there are pretty decent tools, processes, and technologies to enable us to do very good analysis of historic data, and to create flexible on-demand reporting. This type of analysis is great and it supports, but doesn’t replace “strategic procurement”.

What I want is the ability to do it right now, in real time. Procurement should have the ability capture, analyse, and impact each purchasing transaction as it is happening. Notice I changed language, procurement to purchasing. I’m using procurement to signify the “strategic” role and purchasing to denote the transactional role. Here’s the thing, as “Procurement” or “Supply Management”, becomes successful in evolving to a strategic business rather than an operational support role, it can’t forget the transactional purchasing role. There are two main reasons not to forget that role. First, and most obvious, is that much of the rest of the business expects it. If we can’t do our job, then forget about playing in the big leagues.

Second, it’s where “power” lies. Procurement function performs some of our more strategic functions based on analysis; moving volume, substituting products, aggregating deliveries, eliminating redundant payments (duplicative insurance for example), constraining or shaping demand, updating specifications, lowering supplier input costs, and so on. Now do it in real time. Some businesses can accept that procurement needs a fiscal quarter to understand what happened. Many businesses need procurement to help guide what’s happening today, to ensure next quarter’s fiscal results meet expectations.

To me, that’s the future of expenditure analysis.

Cheers,

David Rotor

Surcharges or overcharges?

Update 2: Air Canada is feeling defensive about surcharges. The thing that doesn't ring true to me is that because the airline is hedging fuel prices (and their hedge price is now higher than market price) they want to maintain a higher fuel surcharge. So, I guess when their hedge price is lower than the market, they won't increase the surcharge and cite the rising market price as justification. Right

.

This week's Economist has a report on the falling price of oil. Oil has declined from a high of just over $75 in the summer to just over $55 this week. Call it a 25% decline in 6 months. This might be a good time to have a hard look at any fuel surcharges built into your supplier contracts. You'll find suppliers of parcel and overnight express, travel providers, 3PL (third party logistics) often have contractual rights to add fuel surcharges to your negotiated prices. Less obvious will be suppliers of other goods that add fuel surcharges to their freight/delivery charges, depending on how those are negotiated. Having had a look in recent weeks at some corporate invoices, those surcharges don't seem to be declining as quickly as they rose.

Cheers,

David Rotor



Update 1: It seems that Michael O'Leary, CEO of Ireland's Ryanair agrees with me. Quoted today saying. "There is a fuel surcharge scam going on all over Europe. These aren't discretionary, you can't avoid them. They all said they would review them as oil prices fall. We said it would be a cold day in hell by the time they'd be reducing these fuel surcharges. We've been proven correct."

Searching for a deal

The Canadian press is full of stories this week about Canada's decision to purchase new search and rescue aircraft (SAR). Here's a representative column. In short the issue is whether the decision should be made by using a competitive bid process or whether the government should make the decision without using a bid process. Few commentators are unbiased on this one, politicians are weighing in based on partisan belief. Liberals and the NDP are shouting abuse of power. Conservatives are stating that they are supporting the brave men and women in uniform. Lobbyists, depending on who they lobby for are saying 1) what a great decision!, 2) outrage!, or 3) Canada should buy in Canada!

I'm biased as well, my bias is that the procurement process should be designed to deliver best value, and then that process should be respected. I've previously written that the bid process is often flawed, imposing time and cost that often is not rewarded with better value. Canada is not a major player in defence procurement - as one writer said in response to an article in the Globe and Mail, there were three times as many SAR aircraft sitting outside his window at a base in Washington as Canada was buying for the entire country. The procurement process I found that usually delivered the best value was to piggy-back on larger orders from our allies.

The best known program is the US' Foreign Military Sales program, but our other allies including the UK and Australia run similar programs (as should Canada). This procurement process meets the public policy objectives of open bidding, though the bidding is run by an ally not by a Canadian. The real value is that it dramatically speeds up the procurement process, lowers the adminstrative cost of the program (which can add 30% or more to the real cost of a procurement), and normally delivers the equipment sooner and at a lower cost.

So why is the program so little used? I suspect its because it would make the military sales lobby groups ineffective, reduce the role of politics in procurement decision, and it would also eliminate large numbers of miltary (though desk-bound military) and public service jobs.

Cheers,

David Rotor

Back to business

This past fall I’ve been working to raise a fund to directly invest in improving procurement operations for companies. Over the winter holidays I was informed that the fund will be closing in two tranches, mid-January and March.

The fund is authorized to make investments that will generate financial savings for client companies. My “tag line” for this blog is that “There are few investments a company can make that rival the returns from investing in their own supply chain.” The expected returns from this fund are representative of that thinking. We expect to invest $2-$3 million with a goal of generating $20-$30 million in savings from expenditures of $200-$300 million. Here's a two-page summary of the offer.

Investments from this fund will primarily be used to pay for consulting fees for strategic sourcing – we intend to hire world-class sourcing firms to do the sourcing on these engagements. In order to deploy the funds we’re looking for client companies who are want a risk-free way to lower their cost of purchased goods and services. As this fund progresses I’ll provide, on a “no-names” basis, details of some of the company opportunities we look at, and any investments and savings we make.

And the shameless sales pitch … you can contact me through my blog email, davidrotor@procurementinvestor.com if you know of any companies that might be interested.

Cheers,

David Rotor

Tagged

Wendy has tagged me. I'm meant to:

1. Find the nearest book.
2. Name the book & the author.
3. Turn to page 123.
4. Go to the fifth sentence on the page. Copy out the next three sentences and post to your blog.
5. Tag three more folks.

I'm already off to a bad start with nearest book. I've got a couple of stacks on the desk, I'll take the top one on the pile to the right. Neal Stephenson's The System of the World. Daniel Waterhouse, has recently returned to London and has begun certain investigations.

That brought him clear of Hockley, and into the center of the largest open place in this part of town, where Leather Lane, Liquor Pond Street, and several other ways came together in a crazed, nameless interchange half the size of Charing Cross. There, finally, he turned around. "Your watch, sir, said a bloke, "or so I surmise."

I'll pass on #5 ... It's funny, I don't in any way mind Wendy tagging me, but I feel uncomfortable at doing so to others.